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, 2016

 

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, 2016 was 284,058,764.

 

 

 



Table of Contents

 

The Travelers Companies, Inc.

 

Quarterly Report on Form 10-Q

 

For Quarterly Period Ended September 30, 2016

 


 

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, 2016 and 2015

3

 

 

 

 

Consolidated Statement of Comprehensive Income (Unaudited) — Three Months and Nine Months Ended September 30, 2016 and 2015

4

 

 

 

 

Consolidated Balance Sheet — September 30, 2016 (Unaudited) and December 31, 2015

5

 

 

 

 

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Nine Months Ended September 30, 2016 and 2015

6

 

 

 

 

Consolidated Statement of Cash Flows (Unaudited) — Nine Months Ended September 30, 2016 and 2015

7

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2.

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

40

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

73

 

 

 

Item 4.

Controls and Procedures

74

 

 

 

 

Part II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

74

 

 

 

Item 1A.

Risk Factors

74

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74

 

 

 

Item 5.

Other Information

75

 

 

 

Item 6.

Exhibits

76

 

 

 

 

SIGNATURES

76

 

 

 

 

EXHIBIT INDEX

77

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

Premiums

 

$

6,209

 

$

6,032

 

$

18,257

 

$

17,851

 

Net investment income

 

582

 

614

 

1,675

 

1,838

 

Fee income

 

116

 

116

 

352

 

345

 

Net realized investment gains (1)

 

23

 

15

 

33

 

35

 

Other revenues

 

31

 

21

 

115

 

68

 

Total revenues

 

6,961

 

6,798

 

20,432

 

20,137

 

 

 

 

 

 

 

 

 

 

 

Claims and expenses

 

 

 

 

 

 

 

 

 

Claims and claim adjustment expenses

 

3,856

 

3,382

 

11,330

 

10,360

 

Amortization of deferred acquisition costs

 

1,012

 

987

 

2,972

 

2,913

 

General and administrative expenses

 

1,057

 

1,028

 

3,106

 

3,055

 

Interest expense

 

89

 

94

 

273

 

278

 

Total claims and expenses

 

6,014

 

5,491

 

17,681

 

16,606

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

947

 

1,307

 

2,751

 

3,531

 

Income tax expense

 

231

 

379

 

680

 

958

 

Net income

 

$

716

 

$

928

 

$

2,071

 

$

2,573

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

Basic

 

$

2.48

 

$

3.00

 

$

7.09

 

$

8.13

 

Diluted

 

$

2.45

 

$

2.97

 

$

7.00

 

$

8.04

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

286.0

 

307.6

 

290.0

 

314.3

 

Diluted

 

289.8

 

311.0

 

293.6

 

317.7

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.67

 

$

0.61

 

$

1.95

 

$

1.77

 

 


(1)         Total other-than-temporary impairment (OTTI) losses were $(4) million and $(14) million for the three months ended September 30, 2016 and 2015, respectively, and $(36) million and $(26) million for the nine months ended September 30, 2016 and 2015, respectively.  Of total OTTI, credit losses of $(4) million and $(14) million for the three months ended September 30, 2016 and 2015, respectively, and $(26) million and $(23) million for the nine months ended September 30, 2016 and 2015, respectively, were recognized in net realized investment gains.  In addition, unrealized gains (losses) from other changes in total OTTI of $0 million for both of the three months ended September 30, 2016 and 2015, and $(10) million and $(3) million for the nine months ended September 30, 2016 and 2015, 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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net income

 

$

716

 

$

928

 

$

2,071

 

$

2,573

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Changes in net unrealized gains on investment securities:

 

 

 

 

 

 

 

 

 

Having no credit losses recognized in the consolidated statement of income

 

(455

)

67

 

1,138

 

(829

)

Having credit losses recognized in the consolidated statement of income

 

6

 

(3

)

23

 

(13

)

Net changes in benefit plan assets and obligations

 

16

 

24

 

50

 

71

 

Net changes in unrealized foreign currency translation

 

(31

)

(227

)

37

 

(407

)

Other comprehensive income (loss) before income taxes

 

(464

)

(139

)

1,248

 

(1,178

)

Income tax expense (benefit)

 

(159

)

(2

)

431

 

(330

)

Other comprehensive income (loss), net of taxes

 

(305

)

(137

)

817

 

(848

)

Comprehensive income

 

$

411

 

$

791

 

$

2,888

 

$

1,725

 

 

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,
2016

 

December 31,
2015

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Fixed maturities, available for sale, at fair value (amortized cost $60,149 and $58,878)

 

$

63,036

 

$

60,658

 

Equity securities, available for sale, at fair value (cost $510 and $528)

 

744

 

705

 

Real estate investments

 

929

 

989

 

Short-term securities

 

4,803

 

4,671

 

Other investments

 

3,452

 

3,447

 

Total investments

 

72,964

 

70,470

 

 

 

 

 

 

 

Cash

 

269

 

380

 

Investment income accrued

 

586

 

642

 

Premiums receivable

 

6,785

 

6,437

 

Reinsurance recoverables

 

8,665

 

8,910

 

Ceded unearned premiums

 

741

 

656

 

Deferred acquisition costs

 

1,975

 

1,849

 

Deferred taxes

 

 

296

 

Contractholder receivables

 

4,580

 

4,374

 

Goodwill

 

3,585

 

3,573

 

Other intangible assets

 

271

 

279

 

Other assets

 

2,366

 

2,318

 

Total assets

 

$

102,787

 

$

100,184

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Claims and claim adjustment expense reserves

 

$

48,168

 

$

48,295

 

Unearned premium reserves

 

12,706

 

11,971

 

Contractholder payables

 

4,580

 

4,374

 

Payables for reinsurance premiums

 

431

 

296

 

Deferred taxes

 

171

 

 

Debt

 

6,436

 

6,344

 

Other liabilities

 

5,856

 

5,306

 

Total liabilities

 

78,348

 

76,586

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock (1,750.0 shares authorized; 284.1 and 295.9 shares issued and outstanding)

 

22,419

 

22,172

 

Retained earnings

 

31,443

 

29,945

 

Accumulated other comprehensive income (loss)

 

660

 

(157

)

Treasury stock, at cost (482.9 and 467.6 shares)

 

(30,083

)

(28,362

)

Total shareholders’ equity

 

24,439

 

23,598

 

Total liabilities and shareholders’ equity

 

$

102,787

 

$

100,184

 

 

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

 

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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,

 

2016

 

2015

 

Common stock

 

 

 

 

 

Balance, beginning of year

 

$

22,172

 

$

21,843

 

Employee share-based compensation

 

123

 

105

 

Compensation amortization under share-based plans and other changes

 

124

 

151

 

Balance, end of period

 

22,419

 

22,099

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

Balance, beginning of year

 

29,945

 

27,251

 

Net income

 

2,071

 

2,573

 

Dividends

 

(571

)

(561

)

Other

 

(2

)

 

Balance, end of period

 

31,443

 

29,263

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), net of tax

 

 

 

 

 

Balance, beginning of year

 

(157

)

880

 

Other comprehensive income (loss)

 

817

 

(848

)

Balance, end of period

 

660

 

32

 

 

 

 

 

 

 

Treasury stock (at cost)

 

 

 

 

 

Balance, beginning of year

 

(28,362

)

(25,138

)

Treasury stock acquired — share repurchase authorization

 

(1,650

)

(2,150

)

Net shares acquired related to employee share-based compensation plans

 

(71

)

(73

)

Balance, end of period

 

(30,083

)

(27,361

)

Total shareholders’ equity

 

$

24,439

 

$

24,033

 

 

 

 

 

 

 

Common shares outstanding

 

 

 

 

 

Balance, beginning of year

 

295.9

 

322.2

 

Treasury stock acquired — share repurchase authorization

 

(14.7

)

(20.8

)

Net shares issued under employee share-based compensation plans

 

2.9

 

2.8

 

Balance, end of period

 

284.1

 

304.2

 

 

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

 

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Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

 

For the nine months ended September 30,

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

2,071

 

$

2,573

 

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

 

 

 

 

 

Net realized investment gains

 

(33

)

(35

)

Depreciation and amortization

 

624

 

620

 

Deferred federal income tax expense

 

29

 

105

 

Amortization of deferred acquisition costs

 

2,972

 

2,913

 

Equity in income from other investments

 

(114

)

(214

)

Premiums receivable

 

(340

)

(300

)

Reinsurance recoverables

 

248

 

247

 

Deferred acquisition costs

 

(3,096

)

(2,998

)

Claims and claim adjustment expense reserves

 

(139

)

(874

)

Unearned premium reserves

 

725

 

542

 

Other

 

116

 

95

 

Net cash provided by operating activities

 

3,063

 

2,674

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from maturities of fixed maturities

 

6,648

 

8,805

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturities

 

865

 

1,555

 

Equity securities

 

71

 

38

 

Real estate investments

 

69

 

15

 

Other investments

 

569

 

505

 

Purchases of investments:

 

 

 

 

 

Fixed maturities

 

(9,004

)

(9,972

)

Equity securities

 

(36

)

(31

)

Real estate investments

 

(30

)

(116

)

Other investments

 

(422

)

(389

)

Net purchases of short-term securities

 

(135

)

(782

)

Securities transactions in course of settlement

 

511

 

103

 

Other

 

(240

)

(222

)

Net cash used in investing activities

 

(1,134

)

(491

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Treasury stock acquired — share repurchase authorization

 

(1,650

)

(2,150

)

Treasury stock acquired — net employee share-based compensation

 

(71

)

(73

)

Dividends paid to shareholders

 

(569

)

(557

)

Payment of debt

 

(400

)

 

Issuance of debt

 

491

 

392

 

Issuance of common stock — employee share options

 

164

 

142

 

Excess tax benefits from share-based payment arrangements

 

 

42

 

Net cash used in financing activities

 

(2,035

)

(2,204

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(5

)

(9

)

Net decrease in cash

 

(111

)

(30

)

Cash at beginning of year

 

380

 

374

 

Cash at end of period

 

$

269

 

$

344

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Income taxes paid

 

$

648

 

$

882

 

Interest paid

 

$

223

 

$

217

 

 

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

 

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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, 2015 (the Company’s 2015 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 2015 financial statements to conform to the 2016 presentation.

 

Adoption of Accounting Standards

 

Compensation — Stock Compensation: 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 Financial Accounting Standards Board (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.  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 the 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 was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

 

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the updated guidance clarifies that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The updated guidance was effective for reporting periods beginning after December 15, 2015.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

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Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

 

Consolidation: 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 was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Interest — Imputation of Interest: 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 updated 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 reported as interest expense.  The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.  The updated guidance was effective for reporting periods beginning after December 15, 2015.  The updated guidance is consistent with the Company’s accounting policy and its adoption did not have any effect on the Company’s results of operations, financial position or liquidity.

 

Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments

 

In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively.  The acquirer is also required to recognize, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date. The updated guidance is to be applied prospectively effective for reporting periods beginning after December 15, 2015.  In connection with business combinations which have already been completed, the adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Compensation Stock Compensation: Improvements to Employee Share-Based Payment Accounting

 

In March 2016, the FASB issued updated guidance to simplify several aspects of accounting for share-based payment transactions as follows:

 

Accounting for Income Taxes

 

Under current accounting guidance, if the deduction for a share-based payment award for tax purposes exceeds, or is less than, the compensation cost recognized for financial reporting purposes, the resulting excess tax benefit, or tax deficiency, is reported as part of additional paid-in capital.  Under the updated guidance, these excess tax benefits, or tax deficiencies, are reported as part of income tax expense or benefit in the income statement. The updated guidance also removes the requirement to delay recognition of any excess tax benefit when there are no current taxes payable to which the benefit would be applied.  The tax-related cash flows resulting from share-based payments are to be included with other income tax cash flows as an operating activity rather than being reported separately as a financing activity.

 

Forfeitures

 

The updated guidance permits an entity to make an accounting policy election to either account for forfeitures when they occur or continue to apply the current method of accruing the compensation cost based on the number of awards that are expected to vest.

 

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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

 

Minimum Statutory Tax Withholding Requirements

 

The updated guidance changes the threshold amount an entity can withhold for taxes when settling an equity award and still qualify for equity classification. A company can withhold up to the maximum statutory tax rates in the employees’ applicable jurisdiction rather than withholding up to the employers’ minimum statutory withholding requirement. The update also clarifies that all cash payments made to taxing authorities on behalf of employees for withheld shares are to be presented in financing activities on the statement of cash flows.

 

Transition

 

The updated guidance is effective for reporting periods beginning after December 15, 2016.  Early adoption is permitted in any interim period; if early adoption is elected, the entity must adopt all of the amendments in the same reporting period and reflect any adjustments as of the beginning of the fiscal year.

 

The Company adopted the updated guidance effective January 1, 2016.  With respect to the forfeiture accounting policy election, the Company elected to retain its policy of accruing the compensation cost based on the number of awards that are expected to vest. The adoption did not result in any cumulative effect adjustments or restatement and did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Accounting Standards Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued updated guidance to require lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months.  The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease).  Both lease classifications require the lessee to record the right-to-use asset and the lease liability based upon the present value of cash flows.  Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-to-use asset.  Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease.   The accounting by lessors is not significantly changed by the updated guidance.  The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied.  Early adoption is 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.

 

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

 

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence.  If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings.  The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. Early adoption is 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

 

Derivatives and Hedging:  Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is 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.

 

Financial Instruments — Credit Losses:  Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

 

The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

Additional Accounting Standards Not Yet Adopted

 

For information regarding additional accounting standards that the Company has not yet adopted, see the “Other Accounting Standards Not Yet Adopted section of note 1 of notes to the consolidated financial statements in the Company’s 2015 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 2015 Annual Report.

 

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Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                                      SEGMENT INFORMATION

 

The following tables summarize the components of the Company’s operating 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

 

2016

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,692

 

$

529

 

$

1,988

 

$

6,209

 

Net investment income

 

445

 

53

 

84

 

582

 

Fee income

 

111

 

 

5

 

116

 

Other revenues

 

10

 

4

 

14

 

28

 

Total operating revenues (1)

 

$

4,258

 

$

586

 

$

2,091

 

$

6,935

 

Operating income (1)

 

$

457

 

$

146

 

$

158

 

$

761

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

Premiums

 

$

3,653

 

$

539

 

$

1,840

 

$

6,032

 

Net investment income

 

471

 

56

 

87

 

614

 

Fee income

 

112

 

 

4

 

116

 

Other revenues

 

5

 

4

 

9

 

18

 

Total operating revenues (1)

 

$

4,241

 

$

599

 

$

1,940

 

$

6,780

 

Operating income (1)

 

$

546

 

$

196

 

$

241

 

$

983

 

 


(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

 

2016

 

 

 

 

 

 

 

 

 

Premiums

 

$

10,922

 

$

1,555

 

$

5,780

 

$

18,257

 

Net investment income

 

1,280

 

156

 

239

 

1,675

 

Fee income

 

340

 

 

12

 

352

 

Other revenues

 

51

 

13

 

42

 

106

 

Total operating revenues (1)

 

$

12,593

 

$

1,724

 

$

6,073

 

$

20,390

 

Operating income (1)

 

$

1,326

 

$

492

 

$

413

 

$

2,231

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

Premiums

 

$

10,882

 

$

1,567

 

$

5,402

 

$

17,851

 

Net investment income

 

1,412

 

169

 

257

 

1,838

 

Fee income

 

334

 

 

11

 

345

 

Other revenues

 

18

 

14

 

33

 

65

 

Total operating revenues (1)

 

$

12,646

 

$

1,750

 

$

5,703

 

$

20,099

 

Operating income (1)

 

$

1,604

 

$

471

 

$

667

 

$

2,742

 

 


(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



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
September 30,

 

Nine Months Ended
September 30,

 

(in millions)

 

2016

 

2015

 

2016

 

2015

 

Revenue reconciliation

 

 

 

 

 

 

 

 

 

Earned premiums

 

 

 

 

 

 

 

 

 

Business and International Insurance:

 

 

 

 

 

 

 

 

 

Domestic:

 

 

 

 

 

 

 

 

 

Workers’ compensation

 

$

1,003

 

$

970

 

$

2,971

 

$

2,889

 

Commercial automobile

 

503

 

485

 

1,497

 

1,430

 

Commercial property

 

441

 

444

 

1,320

 

1,324

 

General liability

 

504

 

484

 

1,471

 

1,421

 

Commercial multi-peril

 

788

 

791

 

2,356

 

2,344

 

Other

 

9

 

10

 

23

 

30

 

Total Domestic

 

3,248

 

3,184

 

9,638

 

9,438

 

International

 

444

 

469

 

1,284

 

1,444

 

Total Business and International Insurance

 

3,692

 

3,653

 

10,922

 

10,882

 

 

 

 

 

 

 

 

 

 

 

Bond & Specialty Insurance:

 

 

 

 

 

 

 

 

 

Fidelity and surety

 

245

 

254

 

714

 

719

 

General liability

 

239

 

240

 

708

 

716

 

Other

 

45

 

45

 

133

 

132

 

Total Bond & Specialty Insurance

 

529

 

539

 

1,555

 

1,567

 

 

 

 

 

 

 

 

 

 

 

Personal Insurance:

 

 

 

 

 

 

 

 

 

Automobile

 

1,026

 

893

 

2,936

 

2,592

 

Homeowners and Other

 

962

 

947

 

2,844

 

2,810

 

Total Personal Insurance

 

1,988

 

1,840

 

5,780

 

5,402

 

 

 

 

 

 

 

 

 

 

 

Total earned premiums

 

6,209

 

6,032

 

18,257

 

17,851

 

Net investment income

 

582

 

614

 

1,675

 

1,838

 

Fee income

 

116

 

116

 

352

 

345

 

Other revenues

 

28

 

18

 

106

 

65

 

Total operating revenues for reportable segments

 

6,935

 

6,780

 

20,390

 

20,099

 

Other revenues

 

3

 

3

 

9

 

3

 

Net realized investment gains

 

23

 

15

 

33

 

35

 

Total consolidated revenues

 

$

6,961

 

$

6,798

 

$

20,432

 

$

20,137

 

 

 

 

 

 

 

 

 

 

 

Income reconciliation, net of tax

 

 

 

 

 

 

 

 

 

Total operating income for reportable segments

 

$

761

 

$

983

 

$

2,231

 

$

2,742

 

Interest Expense and Other (1)

 

(60

)

(65

)

(183

)

(191

)

Total operating income

 

701

 

918

 

2,048

 

2,551

 

Net realized investment gains

 

15

 

10

 

23

 

22

 

Total consolidated net income

 

$

716

 

$

928

 

$

2,071

 

$

2,573

 

 


(1)         The primary component of Interest Expense and Other was after-tax interest expense of $57 million and $61 million in the three months ended September 30, 2016 and 2015, respectively, and $177 million and $181 million in the nine months ended September 30, 2016 and 2015, respectively.

 

13



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

(in millions)

 

September 30,
2016

 

December 31,
2015

 

Asset reconciliation:

 

 

 

 

 

Business and International Insurance

 

$

81,232

 

$

79,692

 

Bond & Specialty Insurance

 

7,945

 

7,360

 

Personal Insurance

 

13,327

 

12,748

 

Total assets for reportable segments

 

102,504

 

99,800

 

Other assets (1)

 

283

 

384

 

Total consolidated assets

 

$

102,787

 

$

100,184

 

 


(1)                  The primary component of other assets at September 30, 2016 was other intangible assets and the primary components at December 31, 2015 were other intangible assets and deferred taxes.

 

3.                       INVESTMENTS

 

Fixed Maturities

 

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

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

(at September 30, 2016, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,046

 

$

27

 

$

2

 

$

2,071

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Local general obligation

 

13,930

 

754

 

9

 

14,675

 

Revenue

 

10,668

 

608

 

6

 

11,270

 

State general obligation

 

1,878

 

95

 

3

 

1,970

 

Pre-refunded

 

5,138

 

227

 

 

5,365

 

 

 

 

 

 

 

 

 

 

 

Total obligations of states, municipalities and political subdivisions

 

31,614

 

1,684

 

18

 

33,280

 

Debt securities issued by foreign governments

 

1,703

 

54

 

 

1,757

 

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

 

1,651

 

128

 

1

 

1,778

 

All other corporate bonds

 

23,039

 

1,039

 

31

 

24,047

 

Redeemable preferred stock

 

96

 

7

 

 

103

 

Total

 

$

60,149

 

$

2,939

 

$

52

 

$

63,036

 

 

14



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

 

 

Amortized

 

Gross Unrealized

 

Fair

 

(at December 31, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

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

 

$

2,202

 

$

8

 

$

16

 

$

2,194

 

Obligations of states, municipalities and political subdivisions:

 

 

 

 

 

 

 

 

 

Local general obligation

 

12,744

 

577

 

3

 

13,318

 

Revenue

 

9,492

 

472

 

4

 

9,960

 

State general obligation

 

1,978

 

97

 

2

 

2,073

 

Pre-refunded

 

5,813

 

247

 

 

6,060

 

Total obligations of states, municipalities and political subdivisions

 

30,027

 

1,393

 

9

 

31,411

 

 

 

 

 

 

 

 

 

 

 

Debt securities issued by foreign governments

 

1,829

 

45

 

1

 

1,873

 

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

 

1,863

 

124

 

6

 

1,981

 

All other corporate bonds

 

22,854

 

523

 

288

 

23,089

 

Redeemable preferred stock

 

103

 

7

 

 

110

 

Total

 

$

58,878

 

$

2,100

 

$

320

 

$

60,658

 

 

Pre-refunded bonds of $5.37 billion and $6.06 billion at September 30, 2016 and December 31, 2015, 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 $865 million and $1.56 billion during the nine months ended September 30, 2016 and 2015, respectively. Gross gains of $60 million and $74 million and gross losses of $10 million and $6 million were realized on those sales during the nine months ended September 30, 2016 and 2015, respectively.

 

Equity Securities

 

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

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at September 30, 2016, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

394

 

$

218

 

$

3

 

$

609

 

Non-redeemable preferred stock

 

116

 

24

 

5

 

135

 

Total

 

$

510

 

$

242

 

$

8

 

$

744

 

 

 

 

 

 

Gross Unrealized

 

Fair

 

(at December 31, 2015, in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

Public common stock

 

$

386

 

$

164

 

$

7

 

$

543

 

Non-redeemable preferred stock

 

142

 

26

 

6

 

162

 

Total

 

$

528

 

$

190

 

$

13

 

$

705

 

 

Proceeds from sales of equity securities classified as available for sale were $71 million and $38 million during the nine months ended September 30, 2016 and 2015, respectively.  Gross gains of $12 million and $7 million and gross losses of $3 million and $4 million were realized on those sales during the nine months ended September 30, 2016 and 2015, respectively.

 

15



Table of Contents

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

3.                       INVESTMENTS, Continued

 

Unrealized Investment Losses

 

The following tables summarize, for all investments in an unrealized loss position at September 30, 2016 and December 31, 2015, 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 2015 Annual Report.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

(at September 30, 2016, in millions)

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

146

 

$

1

 

$

10

 

$

1

 

$

156

 

$

2

 

Obligations of states, municipalities and political subdivisions

 

2,255

 

18

 

14

 

 

2,269

 

18

 

Debt securities issued by foreign governments

 

31

 

 

 

 

31

 

 

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

 

116

 

 

20

 

1

 

136

 

1

 

All other corporate bonds

 

1,002

 

7

 

502

 

24

 

1,504

 

31

 

Redeemable preferred stock

 

 

 

7

 

 

7

 

 

Total fixed maturities

 

3,550

 

26

 

553

 

26

 

4,103

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

9

 

1

 

20

 

2

 

29

 

3

 

Non-redeemable preferred stock

 

5

 

 

60

 

5

 

65

 

5

 

Total equity securities

 

14

 

1

 

80

 

7

 

94

 

8

 

Total

 

$

3,564

 

$

27

 

$

633

 

$

33

 

$

4,197

 

$

60

 

 

16



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, 2015, in millions)

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fair
Value

 

Gross
Unrealized
Losses

 

Fixed maturities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

1,820

 

$

15

 

$

28

 

$

1

 

$

1,848

 

$

16

 

Obligations of states, municipalities and political subdivisions

 

928

 

7

 

142

 

2

 

1,070

 

9

 

Debt securities issued by foreign governments

 

172

 

1

 

 

 

172

 

1

 

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

 

473

 

4

 

57

 

2

 

530

 

6

 

All other corporate bonds

 

7,725

 

197

 

710

 

91

 

8,435

 

288

 

Redeemable preferred stock

 

8

 

 

 

 

8

 

 

Total fixed maturities

 

11,126

 

224

 

937

 

96

 

12,063

 

320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Public common stock

 

48

 

6

 

33

 

1

 

81

 

7

 

Non-redeemable preferred stock

 

47

 

3

 

38

 

3

 

85

 

6

 

Total equity securities

 

95

 

9

 

71

 

4

 

166

 

13

 

Total

 

$

11,221

 

$

233

 

$

1,008

 

$

100

 

$

12,229

 

$

333

 

 

Unrealized losses for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at September 30, 2016 totaled $8 million, representing less than 1% of the combined fixed maturity and equity security portfolios on a pre-tax basis and less than 1% of shareholders’ equity on an after-tax basis.

 

Impairment Charges

 

Impairment charges included in net realized investment gains in the consolidated statement of income were $4 million and $14 million for the three months ended September 30, 2016 and 2015, respectively, and $26 million and $23 million for the nine months ended September 30, 2016 and 2015, respectively.

 

The cumulative amount of credit losses on fixed maturities held at September 30, 2016 and 2015, that were recognized in the consolidated statement of income from other-than-temporary impairments (OTTI) and for which a portion of the OTTI was recognized in other comprehensive income (loss) in the consolidated balance sheet was $86 million at both dates.  These credit losses represent less than 1% of the fixed maturity portfolio on a pre-tax basis and less than 1% of shareholders’ equity on an after-tax basis at both dates.  There were no significant changes in the credit component of OTTI during the nine months ended September 30, 2016 and 2015 from that disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2015 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 both September 30, 2016 and December 31, 2015, the Company had $400 million notional value of open U.S. Treasury futures contracts.  Net realized investment gains and losses related to U.S. Treasury futures contracts in the three months and nine months ended September 30, 2016 and 2015 were not significant.

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                       FAIR VALUE MEASUREMENTS

 

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance.  The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.  The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable.  In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.  The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety.  The three levels of the hierarchy are as follows:

 

·                  Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

·                  Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

 

·                  Level 3 - Valuations based on models where significant inputs are not observable.  The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

 

Valuation of Investments Reported at Fair Value in Financial Statements

 

The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both September 30, 2016 and December 31, 2015.

 

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 $146 million and $101 million at September 30, 2016 and December 31, 2015, respectively.  Additionally, the Company holds a small amount of other fixed maturity investments that have characteristics that make them unsuitable for matrix pricing.  For these fixed maturities, the Company obtains a quote from a broker (primarily the market maker).  The fair value of the fixed maturities for which the Company received a broker quote was $73 million and $117 million at September 30, 2016 and December 31, 2015, 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 2015 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 September 30, 2016 and December 31, 2015.  An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                       FAIR VALUE MEASUREMENTS, Continued

 

(at September 30, 2016, in millions)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Invested assets:

 

 

 

 

 

 

 

 

 

Fixed maturities

 

 

 

 

 

 

 

 

 

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

 

$

2,071

 

$

2,071

 

$

 

$

 

Obligations of states, municipalities and political subdivisions

 

33,280

 

 

33,268

 

12

 

Debt securities issued by foreign governments

 

1,757

 

 

1,757

 

 

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

 

1,778

 

 

1,743

 

35

 

All other corporate bonds

 

24,047

 

3

 

23,872

 

172

 

Redeemable preferred stock

 

103

 

3

 

100

 

 

Total fixed maturities

 

63,036

 

2,077

 

60,740

 

219

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

609

 

609

 

 

 

Non-redeemable preferred stock

 

135

 

58

 

77

 

 

Total equity securities

 

744

 

667

 

77

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

49

 

17

 

 

32

 

Total

 

$

63,829

 

$

2,761

 

$

60,817

 

$

251

 

 

(at December 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

 

$

2,194

 

$

2,194

 

$

 

$

 

Obligations of states, municipalities and political subdivisions

 

31,411

 

 

31,398

 

13

 

Debt securities issued by foreign governments

 

1,873

 

 

1,873

 

 

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

 

1,981

 

 

1,957

 

24

 

All other corporate bonds

 

23,089

 

 

22,915

 

174

 

Redeemable preferred stock

 

110

 

3

 

100

 

7

 

Total fixed maturities

 

60,658

 

2,197

 

58,243

 

218

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

Public common stock

 

543

 

543

 

 

 

Non-redeemable preferred stock

 

162

 

55

 

107

 

 

Total equity securities

 

705

 

598

 

107

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

 

56

 

18

 

 

38

 

Total

 

$

61,419

 

$

2,813

 

$

58,350

 

$

256

 

 

During the nine months ended September 30, 2016 and the year ended December 31, 2015, 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 nine months ended September 30, 2016 or the year ended December 31, 2015.

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

4.                       FAIR VALUE MEASUREMENTS, Continued

 

Financial Instruments Disclosed, But Not Carried, At Fair Value

 

The following tables present the carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such assets and liabilities are categorized.

 

(at September 30, 2016, in millions)

 

Carrying
Value

 

Fair
Value

 

Level 1

 

Level 2

 

Level 3

 

Financial assets: