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 June 30, 2014
or
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-10898
The Travelers Companies, Inc.
(Exact name of registrant as specified in its charter)
Minnesota |
|
41-0518860 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
485 Lexington Avenue
New York, NY 10017
(Address of principal executive offices) (Zip Code)
(917) 778-6000
(Registrants 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 |
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Accelerated filer |
o |
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|
| ||
Non-accelerated filer |
o |
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Smaller reporting company |
o |
(Do not check if a smaller reporting company) |
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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 Registrants Common Stock, without par value, outstanding at July 18, 2014 was 339,043,610.
The Travelers Companies, Inc.
Quarterly Report on Form 10-Q
For Quarterly Period Ended June 30, 2014
PART 1 FINANCIAL INFORMATION
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
|
|
Three Months Ended |
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Six Months Ended |
| ||||||||
|
|
2014 |
|
2013 |
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2014 |
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2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
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|
|
|
|
|
|
|
| ||||
Premiums |
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$ |
5,928 |
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$ |
5,603 |
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$ |
11,751 |
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$ |
11,120 |
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Net investment income |
|
695 |
|
687 |
|
1,431 |
|
1,357 |
| ||||
Fee income |
|
112 |
|
82 |
|
219 |
|
179 |
| ||||
Net realized investment gains (1) |
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16 |
|
167 |
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17 |
|
177 |
| ||||
Other revenues |
|
34 |
|
135 |
|
75 |
|
169 |
| ||||
Total revenues |
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6,785 |
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6,674 |
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13,493 |
|
13,002 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Claims and expenses |
|
|
|
|
|
|
|
|
| ||||
Claims and claim adjustment expenses |
|
3,826 |
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3,530 |
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7,141 |
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6,683 |
| ||||
Amortization of deferred acquisition costs |
|
965 |
|
950 |
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1,915 |
|
1,898 |
| ||||
General and administrative expenses |
|
1,001 |
|
931 |
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1,882 |
|
1,846 |
| ||||
Interest expense |
|
92 |
|
86 |
|
184 |
|
178 |
| ||||
Total claims and expenses |
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5,884 |
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5,497 |
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11,122 |
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10,605 |
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|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
901 |
|
1,177 |
|
2,371 |
|
2,397 |
| ||||
Income tax expense |
|
218 |
|
252 |
|
636 |
|
576 |
| ||||
Net income |
|
$ |
683 |
|
$ |
925 |
|
$ |
1,735 |
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$ |
1,821 |
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|
|
|
|
|
|
|
|
|
| ||||
Net income per share |
|
|
|
|
|
|
|
|
| ||||
Basic |
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$ |
1.98 |
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$ |
2.44 |
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$ |
4.97 |
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$ |
4.80 |
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Diluted |
|
$ |
1.95 |
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$ |
2.41 |
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$ |
4.91 |
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$ |
4.75 |
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|
|
|
|
|
|
|
|
|
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Weighted average number of common shares outstanding |
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|
|
|
|
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|
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Basic |
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343.0 |
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375.9 |
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346.9 |
|
376.8 |
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Diluted |
|
346.7 |
|
379.9 |
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350.5 |
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380.8 |
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(1) Total other-than-temporary impairment (OTTI) gains (losses) were $(1) million and $(1) million for the three months ended June 30, 2014 and 2013, respectively, and $(8) million and $(1) million for the six months ended June 30, 2014 and 2013, respectively. Of total OTTI, credit losses of $(1) million and $(2) million for the three months ended June 30, 2014 and 2013, respectively, and $(10) million and $(7) million for the six months ended June 30, 2014 and 2013, respectively, were recognized in net realized investment gains. In addition, unrealized gains from other changes in total OTTI of $0 million and $1 million for the three months ended June 30, 2014 and 2013, respectively, and $2 million and $6 million for the six months ended June 30, 2014 and 2013, respectively, were recognized in other comprehensive income (loss) as part of changes in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.
The accompanying notes are an integral part of the consolidated financial statements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
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Three Months Ended |
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Six Months Ended |
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2014 |
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2013 |
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2014 |
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2013 |
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|
|
|
|
|
|
|
|
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Net income |
|
$ |
683 |
|
$ |
925 |
|
$ |
1,735 |
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$ |
1,821 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss): |
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|
|
|
|
|
|
|
| ||||
Changes in net unrealized gains on investment securities: |
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|
|
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|
|
|
|
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Having no credit losses recognized in the consolidated statement of income |
|
518 |
|
(1,790 |
) |
1,055 |
|
(2,166 |
) | ||||
Having credit losses recognized in the consolidated statement of income |
|
1 |
|
(5 |
) |
3 |
|
4 |
| ||||
Net changes in benefit plan assets and obligations |
|
15 |
|
26 |
|
30 |
|
54 |
| ||||
Net changes in unrealized foreign currency translation |
|
97 |
|
(73 |
) |
54 |
|
(169 |
) | ||||
Other comprehensive income (loss) before income taxes |
|
631 |
|
(1,842 |
) |
1,142 |
|
(2,277 |
) | ||||
Income tax expense (benefit) |
|
196 |
|
(636 |
) |
390 |
|
(761 |
) | ||||
Other comprehensive income (loss), net of taxes |
|
435 |
|
(1,206 |
) |
752 |
|
(1,516 |
) | ||||
Comprehensive income (loss) |
|
$ |
1,118 |
|
$ |
(281 |
) |
$ |
2,487 |
|
$ |
305 |
|
The accompanying notes are an integral part of the consolidated financial statements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
(in millions)
|
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June 30, |
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December 31, |
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(Unaudited) |
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Assets |
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Fixed maturities, available for sale, at fair value (amortized cost $61,841 and $62,196) |
|
$ |
64,583 |
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$ |
63,956 |
|
Equity securities, available for sale, at fair value (cost $648 and $686) |
|
980 |
|
943 |
| ||
Real estate investments |
|
954 |
|
938 |
| ||
Short-term securities |
|
3,818 |
|
3,882 |
| ||
Other investments |
|
3,606 |
|
3,441 |
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Total investments |
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73,941 |
|
73,160 |
| ||
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Cash |
|
311 |
|
294 |
| ||
Investment income accrued |
|
710 |
|
734 |
| ||
Premiums receivable |
|
6,589 |
|
6,125 |
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Reinsurance recoverables |
|
9,508 |
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9,713 |
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Ceded unearned premiums |
|
762 |
|
801 |
| ||
Deferred acquisition costs |
|
1,879 |
|
1,804 |
| ||
Deferred taxes |
|
|
|
303 |
| ||
Contractholder receivables |
|
4,371 |
|
4,328 |
| ||
Goodwill |
|
3,634 |
|
3,634 |
| ||
Other intangible assets |
|
328 |
|
351 |
| ||
Other assets |
|
2,778 |
|
2,565 |
| ||
Total assets |
|
$ |
104,811 |
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$ |
103,812 |
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|
|
|
|
|
| ||
Liabilities |
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|
|
|
| ||
Claims and claim adjustment expense reserves |
|
$ |
50,856 |
|
$ |
50,895 |
|
Unearned premium reserves |
|
12,089 |
|
11,850 |
| ||
Contractholder payables |
|
4,371 |
|
4,328 |
| ||
Payables for reinsurance premiums |
|
397 |
|
298 |
| ||
Deferred taxes |
|
239 |
|
|
| ||
Debt |
|
6,347 |
|
6,346 |
| ||
Other liabilities |
|
4,980 |
|
5,299 |
| ||
Total liabilities |
|
79,279 |
|
79,016 |
| ||
|
|
|
|
|
| ||
Shareholders equity |
|
|
|
|
| ||
Common stock (1,750.0 shares authorized; 339.0 and 353.5 shares issued and outstanding) |
|
21,694 |
|
21,500 |
| ||
Retained earnings |
|
25,662 |
|
24,291 |
| ||
Accumulated other comprehensive income |
|
1,562 |
|
810 |
| ||
Treasury stock, at cost (419.5 and 401.5 shares) |
|
(23,386 |
) |
(21,805 |
) | ||
Total shareholders equity |
|
25,532 |
|
24,796 |
| ||
Total liabilities and shareholders equity |
|
$ |
104,811 |
|
$ |
103,812 |
|
The accompanying notes are an integral part of the consolidated financial statements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
(in millions)
For the six months ended June 30, |
|
2014 |
|
2013 |
| ||
Common stock |
|
|
|
|
| ||
Balance, beginning of year |
|
$ |
21,500 |
|
$ |
21,161 |
|
Employee share-based compensation |
|
94 |
|
106 |
| ||
Compensation amortization under share-based plans and other changes |
|
100 |
|
100 |
| ||
Balance, end of period |
|
21,694 |
|
21,367 |
| ||
|
|
|
|
|
| ||
Retained earnings |
|
|
|
|
| ||
Balance, beginning of year |
|
24,291 |
|
21,352 |
| ||
Net income |
|
1,735 |
|
1,821 |
| ||
Dividends |
|
(367 |
) |
(367 |
) | ||
Other |
|
3 |
|
|
| ||
Balance, end of period |
|
25,662 |
|
22,806 |
| ||
|
|
|
|
|
| ||
Accumulated other comprehensive income, net of tax |
|
|
|
|
| ||
Balance, beginning of year |
|
810 |
|
2,236 |
| ||
Other comprehensive income (loss) |
|
752 |
|
(1,516 |
) | ||
Balance, end of period |
|
1,562 |
|
720 |
| ||
|
|
|
|
|
| ||
Treasury stock (at cost) |
|
|
|
|
| ||
Balance, beginning of year |
|
(21,805 |
) |
(19,344 |
) | ||
Treasury stock acquired share repurchase authorization |
|
(1,525 |
) |
(600 |
) | ||
Net shares acquired related to employee share-based compensation plans |
|
(56 |
) |
(59 |
) | ||
Balance, end of period |
|
(23,386 |
) |
(20,003 |
) | ||
Total shareholders equity |
|
$ |
25,532 |
|
$ |
24,890 |
|
|
|
|
|
|
| ||
Common shares outstanding |
|
|
|
|
| ||
Balance, beginning of year |
|
353.5 |
|
377.4 |
| ||
Treasury stock acquired share repurchase authorization |
|
(17.3 |
) |
(7.3 |
) | ||
Net shares issued under employee share-based compensation plans |
|
2.8 |
|
3.4 |
| ||
Balance, end of period |
|
339.0 |
|
373.5 |
|
The accompanying notes are an integral part of the consolidated financial statements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in millions)
For the six months ended June 30, |
|
2014 |
|
2013 |
| ||
Cash flows from operating activities |
|
|
|
|
| ||
Net income |
|
$ |
1,735 |
|
$ |
1,821 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Net realized investment gains |
|
(17 |
) |
(177 |
) | ||
Depreciation and amortization |
|
442 |
|
435 |
| ||
Deferred federal income tax expense |
|
131 |
|
151 |
| ||
Amortization of deferred acquisition costs |
|
1,915 |
|
1,898 |
| ||
Equity in income from other investments |
|
(257 |
) |
(175 |
) | ||
Premiums receivable |
|
(463 |
) |
(403 |
) | ||
Reinsurance recoverables |
|
206 |
|
747 |
| ||
Deferred acquisition costs |
|
(1,989 |
) |
(1,912 |
) | ||
Claims and claim adjustment expense reserves |
|
(60 |
) |
(1,128 |
) | ||
Unearned premium reserves |
|
235 |
|
345 |
| ||
Other |
|
(550 |
) |
(350 |
) | ||
Net cash provided by operating activities |
|
1,328 |
|
1,252 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities |
|
|
|
|
| ||
Proceeds from maturities of fixed maturities |
|
4,915 |
|
3,901 |
| ||
Proceeds from sales of investments: |
|
|
|
|
| ||
Fixed maturities |
|
785 |
|
572 |
| ||
Equity securities |
|
95 |
|
50 |
| ||
Real estate investments |
|
5 |
|
|
| ||
Other investments |
|
338 |
|
381 |
| ||
Purchases of investments: |
|
|
|
|
| ||
Fixed maturities |
|
(5,449 |
) |
(4,488 |
) | ||
Equity securities |
|
(40 |
) |
(40 |
) | ||
Real estate investments |
|
(36 |
) |
(59 |
) | ||
Other investments |
|
(226 |
) |
(209 |
) | ||
Net sales of short-term securities |
|
60 |
|
81 |
| ||
Securities transactions in course of settlement |
|
204 |
|
60 |
| ||
Acquisition, net of cash acquired |
|
(12 |
) |
|
| ||
Other |
|
(152 |
) |
(157 |
) | ||
Net cash provided by investing activities |
|
487 |
|
92 |
| ||
|
|
|
|
|
| ||
Cash flows from financing activities |
|
|
|
|
| ||
Payment of debt |
|
|
|
(500 |
) | ||
Dividends paid to shareholders |
|
(365 |
) |
(366 |
) | ||
Issuance of common stock employee share options |
|
122 |
|
139 |
| ||
Treasury stock acquired share repurchase authorization |
|
(1,525 |
) |
(600 |
) | ||
Treasury stock acquired net employee share-based compensation |
|
(55 |
) |
(59 |
) | ||
Excess tax benefits from share-based payment arrangements |
|
24 |
|
29 |
| ||
Net cash used in financing activities |
|
(1,799 |
) |
(1,357 |
) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash |
|
1 |
|
(9 |
) | ||
Net increase (decrease) in cash |
|
17 |
|
(22 |
) | ||
Cash at beginning of year |
|
294 |
|
330 |
| ||
Cash at end of period |
|
$ |
311 |
|
$ |
308 |
|
|
|
|
|
|
| ||
Supplemental disclosure of cash flow information |
|
|
|
|
| ||
Income taxes paid |
|
$ |
727 |
|
$ |
495 |
|
Interest paid |
|
$ |
183 |
|
$ |
184 |
|
The accompanying notes are an integral part of the consolidated financial statements.
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 Companys 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 Companys consolidated financial statements and related notes included in the Companys 2013 Annual Report on Form 10-K.
The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates.
On November 1, 2013, the Company acquired all of the issued and outstanding shares of The Dominion of Canada General Insurance Company (Dominion) for an aggregate purchase price of approximately $1.035 billion. Dominion primarily markets personal lines and small commercial insurance business in Canada. At the acquisition date, the Company recorded at fair value $3.91 billion of assets acquired and $2.88 billion of liabilities assumed as part of purchase accounting, including $16 million of identifiable intangible assets and $273 million of goodwill. The operating income and the amount of assets acquired from Dominion were included in the Companys Financial, Professional & International Insurance segment effective at the acquisition date.
Adoption of Accounting Standards Updates
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date
In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance to resolve diversity in practice concerning the recognition, measurement, and disclosure of obligations resulting from certain joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The guidance requires that the reporting entity measure joint and several liability arrangements as the amount the reporting entity agreed to pay on the basis of its arrangement among the co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The updated guidance was effective for the quarter ending March 31, 2014. The adoption of this guidance did not have any effect on the Companys results of operations, financial position or liquidity.
Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
In March 2013, the FASB issued updated guidance to resolve diversity in practice concerning the release of the cumulative foreign currency translation adjustment into net income when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. When a company ceases to have a controlling financial interest in a subsidiary within a foreign entity, the company should recognize any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary had resided. Upon the partial sale of an equity method investment that is a foreign entity, the company should release into earnings a pro rata portion of the cumulative translation adjustment. Upon the partial sale of an equity method investment that is not a foreign entity, the company should release into earnings the cumulative translation adjustment if the partial sale represents a complete or substantially complete liquidation of the foreign entity that holds the equity method investment. The updated guidance was effective for the quarter ending March 31, 2014. The adoption of this guidance did not have any effect on the Companys results of operations, financial position or liquidity.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), (Continued)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued
Accounting Standards Not Yet Adopted
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the FASB issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity) and that have a major effect on a reporting entitys operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance is effective for the quarter ending March 31, 2015. The adoption of this guidance is not expected to have a material effect on the Companys results of operations, financial position or liquidity.
Revenue from Contracts with Customers
In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Companys fee income related to providing claims and policy management services as well as claim and loss prevention services will be subject to this updated guidance.
The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
The updated guidance is effective for the quarter ending March 31, 2017. The adoption of this guidance is not expected to have a material effect on the Companys results of operations, financial position, or liquidity.
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance targets in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award.
The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), (Continued)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued
The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Companys results of operations, financial position or liquidity.
Nature of Operations
For the periods presented in these financial statements, the Company was organized into three reportable business segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. These segments reflected the manner in which the Companys businesses were managed and represented an aggregation of products and services based on type of customer, how the business was marketed and the manner in which risks were underwritten. The specific business segments presented in these financial statements are as follows:
Business Insurance
The Business Insurance segment offers a broad array of property and casualty insurance and insurance-related services to its clients primarily in the United States. Business Insurance is organized into the following six groups, which collectively comprise Business Insurance Core operations: Select Accounts; Commercial Accounts; National Accounts; Industry-Focused Underwriting; Target Risk Underwriting; and Specialized Distribution.
Business Insurance also includes the Special Liability Group (which manages the Companys asbestos and environmental liabilities) and the assumed reinsurance and certain other runoff operations, which collectively are referred to as Business Insurance Other.
Financial, Professional & International Insurance
The Financial, Professional & International Insurance segment includes surety and financial liability coverages, which primarily use credit-based underwriting processes, as well as property and casualty products that are primarily marketed on a domestic basis in Canada, the United Kingdom and the Republic of Ireland, and on an international basis through Lloyds. The segment includes the Bond & Financial Products group as well as the International group. The International group includes Dominion, which the Company acquired in November 2013 and which writes personal lines and small commercial insurance business in Canada.
In addition, the Company owns 49.5% of the common stock of J. Malucelli Participações em Seguros e Resseguros S.A. (JMalucelli), its joint venture in Brazil. JMalucelli primarily writes surety business in Brazil, as well as other property and casualty insurance business in Brazil. The Companys investment in JMalucelli is accounted for using the equity method and is included in other investments on the consolidated balance sheet.
Personal Insurance
The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.
On June 10, 2014, the Company announced a realignment of its management team that gave rise to a realignment of two of its three business segments, effective July 1, 2014. The Companys International Insurance group, which had previously been included in the Financial, Professional & International Insurance segment, will be combined with the Companys previous Business Insurance segment to create a new Business & International Insurance segment. The Bond & Financial Products group, which was the remaining business in the Financial, Professional & International Insurance segment, will now comprise the new Bond & Financial Products segment. The Personal Insurance segment will not be impacted by these changes. The changes were designed to reflect the realignment of the Companys management team and the manner in which the Companys businesses are managed effective July 1, 2014, 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. The newly aligned segments will be presented in the Companys financial statements beginning with the period ending September 30, 2014 and the prior periods presented will be restated to conform to the new presentation.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), (Continued)
2. SEGMENT INFORMATION
The following tables summarize the components of the Companys revenues, operating income and total assets by reportable business segments:
(for the three months |
|
Business |
|
Financial, |
|
Personal |
|
Total |
| ||||
2014 |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
3,067 |
|
$ |
1,088 |
|
$ |
1,773 |
|
$ |
5,928 |
|
Net investment income |
|
496 |
|
105 |
|
94 |
|
695 |
| ||||
Fee income |
|
111 |
|
1 |
|
|
|
112 |
| ||||
Other revenues |
|
8 |
|
8 |
|
17 |
|
33 |
| ||||
Total operating revenues (1) |
|
$ |
3,682 |
|
$ |
1,202 |
|
$ |
1,884 |
|
$ |
6,768 |
|
Operating income (1) |
|
$ |
409 |
|
$ |
254 |
|
$ |
75 |
|
$ |
738 |
|
|
|
|
|
|
|
|
|
|
| ||||
2013 |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
3,018 |
|
$ |
751 |
|
$ |
1,834 |
|
$ |
5,603 |
|
Net investment income |
|
502 |
|
91 |
|
94 |
|
687 |
| ||||
Fee income |
|
82 |
|
|
|
|
|
82 |
| ||||
Other revenues |
|
114 |
|
5 |
|
15 |
|
134 |
| ||||
Total operating revenues (1) |
|
$ |
3,716 |
|
$ |
847 |
|
$ |
1,943 |
|
$ |
6,506 |
|
Operating income (1) |
|
$ |
579 |
|
$ |
154 |
|
$ |
142 |
|
$ |
875 |
|
(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 six months |
|
Business |
|
Financial, |
|
Personal |
|
Total |
| ||||
2014 |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
6,083 |
|
$ |
2,133 |
|
$ |
3,535 |
|
$ |
11,751 |
|
Net investment income |
|
1,026 |
|
211 |
|
194 |
|
1,431 |
| ||||
Fee income |
|
218 |
|
1 |
|
|
|
219 |
| ||||
Other revenues |
|
16 |
|
16 |
|
43 |
|
75 |
| ||||
Total operating revenues (1) |
|
$ |
7,343 |
|
$ |
2,361 |
|
$ |
3,772 |
|
$ |
13,476 |
|
Operating income (1) |
|
$ |
1,062 |
|
$ |
449 |
|
$ |
343 |
|
$ |
1,854 |
|
|
|
|
|
|
|
|
|
|
| ||||
2013 |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
5,960 |
|
$ |
1,486 |
|
$ |
3,674 |
|
$ |
11,120 |
|
Net investment income |
|
989 |
|
183 |
|
185 |
|
1,357 |
| ||||
Fee income |
|
179 |
|
|
|
|
|
179 |
| ||||
Other revenues |
|
127 |
|
10 |
|
33 |
|
170 |
| ||||
Total operating revenues (1) |
|
$ |
7,255 |
|
$ |
1,679 |
|
$ |
3,892 |
|
$ |
12,826 |
|
Operating income (1) |
|
$ |
1,169 |
|
$ |
317 |
|
$ |
339 |
|
$ |
1,825 |
|
(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).
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2. SEGMENT INFORMATION, Continued
Business Segment Reconciliations
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
Revenue reconciliation |
|
|
|
|
|
|
|
|
| ||||
Earned premiums |
|
|
|
|
|
|
|
|
| ||||
Business Insurance: |
|
|
|
|
|
|
|
|
| ||||
Workers compensation |
|
$ |
923 |
|
$ |
897 |
|
$ |
1,831 |
|
$ |
1,744 |
|
Commercial automobile |
|
473 |
|
474 |
|
941 |
|
949 |
| ||||
Commercial property |
|
440 |
|
418 |
|
868 |
|
827 |
| ||||
General liability |
|
457 |
|
444 |
|
904 |
|
881 |
| ||||
Commercial multi-peril |
|
763 |
|
776 |
|
1,518 |
|
1,541 |
| ||||
Other |
|
11 |
|
9 |
|
21 |
|
18 |
| ||||
Total Business Insurance |
|
3,067 |
|
3,018 |
|
6,083 |
|
5,960 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Financial, Professional & International Insurance: |
|
|
|
|
|
|
|
|
| ||||
Fidelity and surety |
|
238 |
|
228 |
|
460 |
|
448 |
| ||||
General liability |
|
241 |
|
221 |
|
478 |
|
434 |
| ||||
International |
|
564 |
|
258 |
|
1,106 |
|
516 |
| ||||
Other |
|
45 |
|
44 |
|
89 |
|
88 |
| ||||
Total Financial, Professional & International Insurance |
|
1,088 |
|
751 |
|
2,133 |
|
1,486 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Personal Insurance: |
|
|
|
|
|
|
|
|
| ||||
Automobile |
|
821 |
|
864 |
|
1,636 |
|
1,736 |
| ||||
Homeowners and other |
|
952 |
|
970 |
|
1,899 |
|
1,938 |
| ||||
Total Personal Insurance |
|
1,773 |
|
1,834 |
|
3,535 |
|
3,674 |
| ||||
Total earned premiums |
|
5,928 |
|
5,603 |
|
11,751 |
|
11,120 |
| ||||
Net investment income |
|
695 |
|
687 |
|
1,431 |
|
1,357 |
| ||||
Fee income |
|
112 |
|
82 |
|
219 |
|
179 |
| ||||
Other revenues |
|
33 |
|
134 |
|
75 |
|
170 |
| ||||
Total operating revenues for reportable segments |
|
6,768 |
|
6,506 |
|
13,476 |
|
12,826 |
| ||||
Other revenues |
|
1 |
|
1 |
|
|
|
(1 |
) | ||||
Net realized investment gains |
|
16 |
|
167 |
|
17 |
|
177 |
| ||||
Total consolidated revenues |
|
$ |
6,785 |
|
$ |
6,674 |
|
$ |
13,493 |
|
$ |
13,002 |
|
|
|
|
|
|
|
|
|
|
| ||||
Income reconciliation, net of tax |
|
|
|
|
|
|
|
|
| ||||
Total operating income for reportable segments |
|
$ |
738 |
|
$ |
875 |
|
$ |
1,854 |
|
$ |
1,825 |
|
Interest Expense and Other (1) |
|
(65 |
) |
(59 |
) |
(129 |
) |
(122 |
) | ||||
Total operating income |
|
673 |
|
816 |
|
1,725 |
|
1,703 |
| ||||
Net realized investment gains |
|
10 |
|
109 |
|
10 |
|
118 |
| ||||
Total consolidated net income |
|
$ |
683 |
|
$ |
925 |
|
$ |
1,735 |
|
$ |
1,821 |
|
(1) The primary component of Interest Expense and Other is after-tax interest expense of $60 million and $56 million in the three months ended June 30, 2014 and 2013, respectively, and $120 million and $116 million in the six months ended June 30, 2014 and 2013, respectively.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2. SEGMENT INFORMATION, Continued
(in millions) |
|
June 30, |
|
December 31, |
| ||
Asset reconciliation: |
|
|
|
|
| ||
Business Insurance |
|
$ |
74,470 |
|
$ |
73,746 |
|
Financial, Professional & International Insurance |
|
16,856 |
|
16,691 |
| ||
Personal Insurance |
|
12,948 |
|
12,870 |
| ||
Total assets for reportable segments |
|
104,274 |
|
103,307 |
| ||
Other assets (1) |
|
537 |
|
505 |
| ||
Total consolidated assets |
|
$ |
104,811 |
|
$ |
103,812 |
|
(1) The primary components of other assets at both dates were other intangible assets and accrued over-funded benefit plan assets related to the Companys qualified domestic pension plan.
3. INVESTMENTS
Fixed Maturities
The amortized cost and fair value of investments in fixed maturities classified as available for sale were as follows:
|
|
Amortized |
|
Gross Unrealized |
|
Fair |
| ||||||
(at June 30, 2014, in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities |
|
$ |
2,060 |
|
$ |
40 |
|
$ |
6 |
|
$ |
2,094 |
|
Obligations of states, municipalities and political subdivisions: |
|
|
|
|
|
|
|
|
| ||||
Pre-refunded |
|
8,096 |
|
359 |
|
|
|
8,455 |
| ||||
All other |
|
25,309 |
|
1,341 |
|
80 |
|
26,570 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total obligations of states, municipalities and political subdivisions |
|
33,405 |
|
1,700 |
|
80 |
|
35,025 |
| ||||
Debt securities issued by foreign governments |
|
2,549 |
|
37 |
|
4 |
|
2,582 |
| ||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
2,154 |
|
178 |
|
6 |
|
2,326 |
| ||||
All other corporate bonds |
|
21,541 |
|
969 |
|
95 |
|
22,415 |
| ||||
Redeemable preferred stock |
|
132 |
|
9 |
|
|
|
141 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
61,841 |
|
$ |
2,933 |
|
$ |
191 |
|
$ |
64,583 |
|
|
|
Amortized |
|
Gross Unrealized |
|
Fair |
| ||||||
(at December 31, 2013, in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities |
|
$ |
2,288 |
|
$ |
39 |
|
$ |
12 |
|
$ |
2,315 |
|
Obligations of states, municipalities and political subdivisions: |
|
|
|
|
|
|
|
|
| ||||
Pre-refunded |
|
9,074 |
|
445 |
|
1 |
|
9,518 |
| ||||
All other |
|
25,414 |
|
991 |
|
361 |
|
26,044 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total obligations of states, municipalities and political subdivisions |
|
34,488 |
|
1,436 |
|
362 |
|
35,562 |
| ||||
Debt securities issued by foreign governments |
|
2,552 |
|
33 |
|
8 |
|
2,577 |
| ||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
2,263 |
|
179 |
|
18 |
|
2,424 |
| ||||
All other corporate bonds |
|
20,472 |
|
767 |
|
299 |
|
20,940 |
| ||||
Redeemable preferred stock |
|
133 |
|
6 |
|
1 |
|
138 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
62,196 |
|
$ |
2,460 |
|
$ |
700 |
|
$ |
63,956 |
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3. INVESTMENTS, Continued
Pre-refunded bonds of $8.46 billion and $9.52 billion at June 30, 2014 and December 31, 2013, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest.
Equity Securities
The cost and fair value of investments in equity securities were as follows:
|
|
|
|
Gross Unrealized |
|
Fair |
| ||||||
(at June 30, 2014, in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Common stock |
|
$ |
396 |
|
$ |
303 |
|
$ |
|
|
$ |
699 |
|
Non-redeemable preferred stock |
|
252 |
|
31 |
|
2 |
|
281 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
648 |
|
$ |
334 |
|
$ |
2 |
|
$ |
980 |
|
|
|
|
|
Gross Unrealized |
|
Fair |
| ||||||
(at December 31, 2013, in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
| ||||
Common stock |
|
$ |
385 |
|
$ |
226 |
|
$ |
1 |
|
$ |
610 |
|
Non-redeemable preferred stock |
|
301 |
|
34 |
|
2 |
|
333 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
$ |
686 |
|
$ |
260 |
|
$ |
3 |
|
$ |
943 |
|
Unrealized Investment Losses
The following tables summarize, for all investments in an unrealized loss position at June 30, 2014 and December 31, 2013, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4.
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
| ||||||||||||
(at June 30, 2014, in millions) |
|
Fair |
|
Gross |
|
Fair |
|
Gross |
|
Fair |
|
Gross |
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities |
|
$ |
40 |
|
$ |
1 |
|
$ |
106 |
|
$ |
5 |
|
$ |
146 |
|
$ |
6 |
|
Obligations of states, municipalities and political subdivisions |
|
1,378 |
|
4 |
|
2,750 |
|
76 |
|
4,128 |
|
80 |
| ||||||
Debt securities issued by foreign governments |
|
425 |
|
2 |
|
115 |
|
2 |
|
540 |
|
4 |
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
77 |
|
|
|
268 |
|
6 |
|
345 |
|
6 |
| ||||||
All other corporate bonds |
|
1,015 |
|
7 |
|
2,914 |
|
88 |
|
3,929 |
|
95 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total fixed maturities |
|
2,935 |
|
14 |
|
6,153 |
|
177 |
|
9,088 |
|
191 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common stock |
|
29 |
|
|
|
1 |
|
|
|
30 |
|
|
| ||||||
Non-redeemable preferred stock |
|
152 |
|
2 |
|
|
|
|
|
152 |
|
2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total equity securities |
|
181 |
|
2 |
|
1 |
|
|
|
182 |
|
2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
3,116 |
|
$ |
16 |
|
$ |
6,154 |
|
$ |
177 |
|
$ |
9,270 |
|
$ |
193 |
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3. INVESTMENTS, Continued
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
| ||||||||||||
(at December 31, 2013, in millions) |
|
Fair |
|
Gross |
|
Fair |
|
Gross |
|
Fair |
|
Gross |
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities |
|
$ |
433 |
|
$ |
12 |
|
$ |
|
|
$ |
|
|
$ |
433 |
|
$ |
12 |
|
Obligations of states, municipalities and political subdivisions |
|
4,785 |
|
298 |
|
432 |
|
64 |
|
5,217 |
|
362 |
| ||||||
Debt securities issued by foreign governments |
|
907 |
|
8 |
|
1 |
|
|
|
908 |
|
8 |
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
542 |
|
17 |
|
21 |
|
1 |
|
563 |
|
18 |
| ||||||
All other corporate bonds |
|
6,887 |
|
253 |
|
421 |
|
46 |
|
7,308 |
|
299 |
| ||||||
Redeemable preferred stock |
|
82 |
|
1 |
|
|
|
|
|
82 |
|
1 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total fixed maturities |
|
13,636 |
|
589 |
|
875 |
|
111 |
|
14,511 |
|
700 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common stock |
|
53 |
|
1 |
|
|
|
|
|
53 |
|
1 |
| ||||||
Non-redeemable preferred stock |
|
147 |
|
2 |
|
|
|
|
|
147 |
|
2 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total equity securities |
|
200 |
|
3 |
|
|
|
|
|
200 |
|
3 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
|
$ |
13,836 |
|
$ |
592 |
|
$ |
875 |
|
$ |
111 |
|
$ |
14,711 |
|
$ |
703 |
|
The following table summarizes, for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at June 30, 2014, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:
|
|
Period For Which Fair Value Is Less Than 80% of Amortized Cost |
| |||||||||||||
(at June 30, 2014, in millions) |
|
3 Months |
|
Greater Than 3 |
|
Greater Than 6 |
|
Greater Than |
|
Total |
| |||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
| |||||
Mortgage-backed securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Other |
|
1 |
|
4 |
|
1 |
|
2 |
|
8 |
| |||||
Total fixed maturities |
|
1 |
|
4 |
|
1 |
|
2 |
|
8 |
| |||||
Equity securities |
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
1 |
|
$ |
4 |
|
$ |
1 |
|
$ |
2 |
|
$ |
8 |
|
These unrealized losses at June 30, 2014 represented less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders equity on an after-tax basis.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3. INVESTMENTS, Continued
Impairment Charges
Impairment charges included in net realized investment gains in the consolidated statement of income were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Fixed maturities |
|
|
|
|
|
|
|
|
| ||||
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Obligations of states, municipalities and political subdivisions |
|
|
|
|
|
|
|
|
| ||||
Debt securities issued by foreign governments |
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
1 |
|
1 |
|
1 |
|
2 |
| ||||
All other corporate bonds |
|
|
|
|
|
3 |
|
|
| ||||
Redeemable preferred stock |
|
|
|
|
|
|
|
|
| ||||
Total fixed maturities |
|
1 |
|
1 |
|
4 |
|
2 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
|
|
1 |
|
5 |
|
1 |
| ||||
Non-redeemable preferred stock |
|
|
|
|
|
|
|
|
| ||||
Total equity securities |
|
|
|
1 |
|
5 |
|
1 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other investments |
|
|
|
|
|
1 |
|
4 |
| ||||
Total |
|
$ |
1 |
|
$ |
2 |
|
$ |
10 |
|
$ |
7 |
|
The following tables present the cumulative amount of and the changes during the reporting period in the credit losses of other-than-temporary impairments (OTTI) on fixed maturities recognized in the consolidated statement of income for which a portion of the OTTI was recognized in other comprehensive income:
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3. INVESTMENTS, Continued
|
|
2014 |
| ||||||||||||||||
(for the three months ended June 30, in |
|
Cumulative |
|
Additions for |
|
Additions for |
|
Reductions |
|
Adjustments to |
|
Cumulative |
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
$ |
42 |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
43 |
|
All other corporate bonds |
|
69 |
|
|
|
|
|
|
|
(3 |
) |
66 |
| ||||||
Total fixed maturities |
|
$ |
111 |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
(3 |
) |
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(for the six months ended June 30, in |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
$ |
53 |
|
$ |
|
|
$ |
1 |
|
$ |
(3 |
) |
$ |
(8 |
) |
$ |
43 |
|
All other corporate bonds |
|
65 |
|
|
|
3 |
|
|
|
(2 |
) |
66 |
| ||||||
Total fixed maturities |
|
$ |
118 |
|
$ |
|
|
$ |
4 |
|
$ |
(3 |
) |
$ |
(10 |
) |
$ |
109 |
|
|
|
2013 |
| ||||||||||||||||
(for the three months ended June 30, in |
|
Cumulative |
|
Additions for |
|
Additions for |
|
Reductions |
|
Adjustments to |
|
Cumulative |
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
$ |
55 |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
(1 |
) |
$ |
55 |
|
All other corporate bonds |
|
71 |
|
|
|
|
|
|
|
(1 |
) |
70 |
| ||||||
Total fixed maturities |
|
$ |
126 |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
(2 |
) |
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
(for the six months ended June 30, in |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
$ |
55 |
|
$ |
|
|
$ |
2 |
|
$ |
|
|
$ |
(2 |
) |
$ |
55 |
|
All other corporate bonds |
|
72 |
|
|
|
|
|
|
|
(2 |
) |
70 |
| ||||||
Total fixed maturities |
|
$ |
127 |
|
$ |
|
|
$ |
2 |
|
$ |
|
|
$ |
(4 |
) |
$ |
125 |
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3. INVESTMENTS, Continued
Derivative Financial Instruments
From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At June 30, 2014 and December 31, 2013, the Company had $100 million and $0 notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains in the three months ended June 30, 2014 and 2013 included net losses of $1 million and net gains of $134 million, respectively, related to U.S. Treasury futures contracts. Net realized investment gains in the six months ended June 30, 2014 and 2013 included net losses of $0.2 million and net gains of $115 million, respectively, related to U.S. Treasury futures contracts.
4. FAIR VALUE MEASUREMENTS
The Companys 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 Companys 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 Companys own assumptions about the inputs that market participants would use.
Valuation of Investments Reported at Fair Value in Financial Statements
The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties; i.e., not in a forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g.; a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.
For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from a third party, nationally recognized pricing service (pricing service). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly used for its fixed maturity investments. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arms length transaction.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4. FAIR VALUE MEASUREMENTS, Continued
Fixed Maturities
The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both June 30, 2014 and December 31, 2013. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.
The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
The pricing service utilized by the Company has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for any market-based inputs that were unavailable due to market conditions.
The fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than U.S. Treasury securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair value of U.S. Treasury securities is included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.
The Company also holds certain fixed maturity investments which are not priced by the pricing service and, accordingly, estimates the fair value of such fixed maturities using an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are the BofA Merrill Lynch U.S. Corporate Index and the BofA Merrill Lynch High Yield BB Rated Index. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable.
While the vast majority of the Companys municipal bonds and corporate bonds 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 $134 million and $94 million at June 30, 2014 and December 31, 2013, 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 $130 million and $161 million at June 30, 2014 and December 31, 2013, 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.
Equities Public Common and Preferred
For public common and preferred stocks, the Company receives prices from a nationally recognized pricing service that are based on observable market transactions and includes these estimates in the amount disclosed in Level 1. When current market quotes in active markets are unavailable for certain non-redeemable preferred stocks held by the Company, the
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4. FAIR VALUE MEASUREMENTS, Continued
Company receives an estimate of fair value from the pricing service that provides fair value estimates for the Companys fixed maturities. The service utilizes similar methodologies to price the non-redeemable preferred stocks as it does for the fixed maturities. The Company includes the fair value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.
Other Investments
The Company holds investments in various publicly-traded securities which are reported in other investments. These investments include mutual funds and other small holdings. The $19 million fair value of these investments at both June 30, 2014 and December 31, 2013 was disclosed in Level 1. At June 30, 2014 and December 31, 2013, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $36 million and $34 million, respectively, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at June 30, 2014 and December 31, 2013 in the amount disclosed in Level 3.
Derivatives
At June 30, 2014 and December 31, 2013, the Company held $9 million and $8 million, respectively, of convertible bonds containing embedded conversion options that are valued separately from the host bond contract in the amount disclosed in Level 2 fixed maturities.
Fair Value Hierarchy
The following tables present the level within the fair value hierarchy at which the Companys financial assets and financial liabilities are measured on a recurring basis at June 30, 2014 and December 31, 2013. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.
(at June 30, 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 |
|
$ |
2,094 |
|
$ |
2,077 |
|
$ |
17 |
|
$ |
|
|
Obligations of states, municipalities and political subdivisions |
|
35,025 |
|
|
|
35,012 |
|
13 |
| ||||
Debt securities issued by foreign governments |
|
2,582 |
|
|
|
2,582 |
|
|
| ||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
2,326 |
|
|
|
2,275 |
|
51 |
| ||||
All other corporate bonds |
|
22,415 |
|
21 |
|
22,203 |
|
191 |
| ||||
Redeemable preferred stock |
|
141 |
|
|
|
132 |
|
9 |
| ||||
Total fixed maturities |
|
64,583 |
|
2,098 |
|
62,221 |
|
264 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
699 |
|
699 |
|
|
|
|
| ||||
Non-redeemable preferred stock |
|
281 |
|
123 |
|
158 |
|
|
| ||||
Total equity securities |
|
980 |
|
822 |
|
158 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other investments |
|
55 |
|
19 |
|
|
|
36 |
| ||||
Total |
|
$ |
65,618 |
|
$ |
2,939 |
|
$ |
62,379 |
|
$ |
300 |
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4. FAIR VALUE MEASUREMENTS, Continued
During the six months ended June 30, 2014, the Company had transfers of $1 million of obligations of states, municipalities and political subdivisions and $4 million of non-redeemable preferred stock from Level 1 to Level 2. In addition, the Company had transfers of $10 million of non-redeemable preferred stock from Level 2 to Level 1.
(at December 31, 2013, 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 |
|
$ |
2,315 |
|
$ |
2,298 |
|
$ |
17 |
|
$ |
|
|
Obligations of states, municipalities and political subdivisions |
|
35,562 |
|
1 |
|
35,538 |
|
23 |
| ||||
Debt securities issued by foreign governments |
|
2,577 |
|
|
|
2,577 |
|
|
| ||||
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities |
|
2,424 |
|
|
|
2,415 |
|
9 |
| ||||
All other corporate bonds |
|
20,940 |
|
|
|
20,726 |
|
214 |
| ||||
Redeemable preferred stock |
|
138 |
|
|
|
129 |
|
9 |
| ||||
Total fixed maturities |
|
63,956 |
|
2,299 |
|
61,402 |
|
255 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Equity securities |
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
610 |
|
610 |
|
|
|
|
| ||||
Non-redeemable preferred stock |
|
333 |
|
138 |
|
195 |
|
|
| ||||
Total equity securities |
|
943 |
|
748 |
|
195 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other investments |
|
53 |
|
19 |
|
|
|
34 |
| ||||
Total |
|
$ |
64,952 |
|
$ |
3,066 |
|
$ |
61,597 |
|
$ |
289 |
|
During the year ended December 31, 2013, the Company had transfers of $31 million of redeemable preferred stock and $54 million of non-redeemable preferred stock from Level 1 to Level 2.
The following tables present the changes in the Level 3 fair value category during the three months and six months ended June 30, 2014 and the twelve months ended December 31, 2013.
Three Months Ended June 30, 2014 (in millions) |
|
Fixed |
|
Other |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at March 31, 2014 |
|
$ |
267 |
|
$ |
37 |
|
$ |
304 |
|
Total realized and unrealized investment gains (losses): |
|
|
|
|
|
|
| |||
Reported in net realized investment gains (1) |
|
1 |
|
|
|
1 |
| |||
Reported in increases (decreases) in other comprehensive income |
|
2 |
|
(1 |
) |
1 |
| |||
Purchases, sales and settlements/maturities: |
|
|
|
|
|
|
| |||
Purchases |
|
58 |
|
|
|
58 |
| |||
Sales |
|
(1 |
) |
|
|
(1 |
) | |||
Settlements/maturities |
|
(31 |
) |
|
|
(31 |
) | |||
Gross transfers into Level 3 |
|
|
|
|
|
|
| |||
Gross transfers out of Level 3 |
|
(32 |
) |
|
|
(32 |
) | |||
Balance at June 30, 2014 |
|
$ |
264 |
|
$ |
36 |
|
$ |
300 |
|
|
|
|
|
|
|
|
| |||
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date |
|
$ |
|
|
$ |
|
|
$ |
|
|
(1) Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4. FAIR VALUE MEASUREMENTS, Continued
Six Months Ended June 30, 2014 (in millions) |
|
Fixed |
|
Other |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2013 |
|
$ |
255 |
|
$ |
34 |
|
$ |
289 |
|
Total realized and unrealized investment gains (losses): |
|
|
|
|
|
|
| |||
Reported in net realized investment gains (1) |
|
2 |
|
1 |
|
3 |
| |||
Reported in increases (decreases) in other comprehensive income |
|
|
|
|
|
|
| |||
Purchases, sales and settlements/maturities: |
|
|
|
|
|
|
| |||
Purchases |
|
142 |
|
1 |
|
143 |
| |||
Sales |
|
(1 |
) |
|
|
(1 |
) | |||
Settlements/maturities |
|
(60 |
) |
|
|
(60 |
) | |||
Gross transfers into Level 3 |
|
|
|
|
|
|
| |||
Gross transfers out of Level 3 |
|
(74 |
) |
|
|
(74 |
) | |||
Balance at June 30, 2014 |
|
$ |
264 |
|
$ |
36 |
|
$ |
300 |
|
|
|
|
|
|
|
|
| |||
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date |
|
$ |
|
|
$ |
|
|
$ |
|
|
(1) Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.
Twelve Months Ended December 31, 2013 (in millions) |
|
Fixed |
|
Other |
|
Total |
| |||
|
|
|
|
|
|
|
| |||
Balance at December 31, 2012 |
|
$ |
230 |
|
$ |
54 |
|
$ |
284 |
|
Total realized and unrealized investment gains (losses): |
|
|
|
|
|
|
| |||
Reported in net realized investment gains (1) |
|
4 |
|
12 |
|
16 |
| |||
Reported in increases (decreases) in other comprehensive income |
|
(2 |
) |
1 |
|
(1 |
) | |||
Purchases, sales and settlements/maturities: |
|
|
|
|
|
|
| |||
Purchases |
|
180 |
|
|
|
180 |
| |||
Sales |
|
(25 |
) |
(33 |
) |
(58 |
) | |||
Settlements/maturities |
|
(83 |
) |
|
|
(83 |
) | |||
Gross transfers into Level 3 |
|
15 |
|
|
|
15 |
| |||
Gross transfers out of Level 3 |
|
(64 |
) |
|
|
(64 |
) | |||
Balance at December 31, 2013 |
|
$ |
255 |
|
$ |
34 |
|
$ |
289 |
|
|
|
|
|
|
|
|
| |||
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date |
|
$ |
|
|
$ |
|
|
$ |
|
|
(1) Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.
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 Company uses various financial instruments in the normal course of its business. The Companys insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below. The following tables present the carrying value and fair value of the Companys financial assets and financial liabilities disclosed, but not carried, at fair value at June 30, 2014 and December 31, 2013, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis.
(at June 30, 2014, in millions) |
|
Carrying |
|
Fair |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Short-term securities |
|
$ |
3,818 |
|
$ |
3,818 |
|
$ |
1,290 |
|
$ |
2,477 |
|
$ |
51 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Debt |
|
$ |
6,247 |
|
$ |
7,452 |
|
$ |
|
|
$ |
7,452 |
|
$ |
|
|
Commercial paper |
|
$ |
100 |
|
$ |
100 |
|
$ |
|
|
$ |
100 |
|
$ |
|
|
(at December 31, 2013, in millions) |
|
Carrying |
|
Fair |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Short-term securities |
|
$ |
3,882 |
|
$ |
3,882 |
|
$ |
1,608 |
|
$ |
2,215 |
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Debt |
|
$ |
6,246 |
|
$ |
7,123 |
|
$ |
|
|
$ |
7,123 |
|
$ |
|
|
Commercial paper |
|
$ |
100 |
|
$ |
100 |
|
$ |
|
|
$ |
100 |
|
$ |
|
|
The Company utilized a pricing service to estimate fair value for approximately 97% of short-term securities at both June 30, 2014 and December 31, 2013. A description of the process and inputs used by the pricing service to estimate fair value is discussed in the Fixed Maturities section above. Estimates of fair value for U.S. Treasury securities and money market funds are based on market quotations received from the pricing service and are disclosed in Level 1 of the hierarchy. The fair value of other short-term fixed maturity securities is estimated by the pricing service using observable market inputs and is disclosed in Level 2 of the hierarchy. For short-term securities where an estimate is not obtained from the pricing service, the carrying value approximates fair value and is included in Level 3 of the hierarchy.
The Company utilized a pricing service to estimate fair value for 100% of its debt, including commercial paper, at both June 30, 2014 and December 31, 2013. The pricing service utilizes market quotations for debt that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the fair value estimates are based on market observable inputs and disclosed in Level 2 of the hierarchy.
The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the six months ended June 30, 2014 or twelve months ended December 31, 2013.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table presents the carrying amount of the Companys goodwill by segment at June 30, 2014 and December 31, 2013:
(in millions) |
|
June 30, |
|
December 31, |
| ||
Business Insurance |
|
$ |
2,168 |
|
$ |
2,168 |
|
Financial, Professional & International Insurance (1) |
|
826 |
|
826 |
| ||
Personal Insurance |
|
613 |
|
613 |
| ||
Other |
|
27 |
|
27 |
| ||
Total |
|
$ |
3,634 |
|
$ |
3,634 |
|
(1) Includes goodwill associated with the Companys acquisition of Dominion in 2013, which is subject to the impact of changes in foreign currency exchange rates.
Other Intangible Assets
The following presents a summary of the Companys other intangible assets by major asset class at June 30, 2014 and December 31, 2013:
(at June 30, 2014, in millions) |
|
Gross |
|
Accumulated |
|
Net |
| |||
Intangibles subject to amortization |
|
|
|
|
|
|
| |||
Customer-related |
|
$ |
460 |
|
$ |
429 |
|
$ |
31 |
|
Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles (1) |
|
201 |
|
121 |
|
80 |
| |||
Total intangible assets subject to amortization |
|
661 |
|
550 |
|
111 |
| |||
Intangible assets not subject to amortization |
|
217 |
|
|
|
217 |
| |||
Total other intangible assets |
|
$ |
878 |
|
$ |
550 |
|
$ |
328 |
|
(at December 31, 2013, in millions) |
|
Gross |
|
Accumulated |
|
Net |
| |||
Intangibles subject to amortization |
|
|
|
|
|
|
| |||
Customer-related |
|
$ |
460 |
|
$ |
414 |
|
$ |
46 |
|
Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles (1) |
|
201 |
|
113 |
|
88 |
| |||
Total intangible assets subject to amortization |
|
661 |
|
527 |
|
134 |
| |||
Intangible assets not subject to amortization |
|
217 |
|
|
|
217 |
| |||
Total other intangible assets |
|
$ |
878 |
|
$ |
527 |
|
$ |
351 |
|
(1) The time value of money and the risk margin (cost of capital) components of the intangible asset run off at different rates, and, as such, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
5. GOODWILL AND OTHER INTANGIBLE ASSETS, Continued
The following presents a summary of the Companys amortization expense for other intangible assets by major asset class:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Customer-related |
|
$ |
7 |
|
$ |
8 |
|
$ |
15 |
|
$ |
15 |
|
Fair value adjustment on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangibles |
|
4 |
|
4 |
|
8 |
|
8 |
| ||||
Total amortization expense |
|
$ |
11 |
|
$ |
12 |
|
$ |
23 |
|
$ |
23 |
|
Intangible asset amortization expense is estimated to be $24 million for the remainder of 2014, $27 million in 2015, $10 million in 2016, $9 million in 2017, and $8 million in 2018.
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes in the Companys accumulated other comprehensive income (AOCI) for the six months ended June 30, 2014.
(in millions) |
|
Changes in Net |
|
Changes in Net |
|
Net Benefit Plan |
|
Net Unrealized |
|
Total Accumulated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance, December 31, 2013 |
|
$ |
1,125 |
|
$ |
197 |
|
$ |
(431 |
) |
$ |
(81 |
) |
$ |
810 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income (OCI) before reclassifications |
|
708 |
|
|
|
|
|
43 |
|
751 |
| |||||
Amounts reclassified from AOCI |
|
(19 |
) |
2 |
|
18 |
|
|
|
1 |
| |||||
Net OCI, current period |
|
689 |
|
2 |
|
18 |
|
43 |
|
752 |
| |||||
Balance, June 30, 2014 |
|
$ |
1,814 |
|
$ |
199 |
|
$ |
(413 |
) |
$ |
(38 |
) |
$ |
1,562 |
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued
The following tables present the pretax components of the Companys other comprehensive income (loss) and the related income tax expense (benefit) for the three months and six months ended June 30, 2014 and 2013.
(for the three months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Changes in net unrealized gains on investment securities: |
|
|
|
|
| ||
Having no credit losses recognized in the consolidated statement of income |
|
$ |
518 |
|
$ |
(1,790 |
) |
Income tax expense (benefit) |
|
180 |
|
(621 |
) | ||
Net of taxes |
|
338 |
|
(1,169 |
) | ||
|
|
|
|
|
| ||
Having credit losses recognized in the consolidated statement of income |
|
1 |
|
(5 |
) | ||
Income tax expense (benefit) |
|
|
|
(2 |
) | ||
Net of taxes |
|
1 |
|
(3 |
) | ||
|
|
|
|
|
| ||
Net changes in benefit plan assets and obligations |
|
15 |
|
26 |
| ||
Income tax expense |
|
5 |
|
9 |
| ||
Net of taxes |
|
10 |
|
17 |
| ||
|
|
|
|
|
| ||
Net changes in unrealized foreign currency translation |
|
97 |
|
(73 |
) | ||
Income tax expense (benefit) |
|
11 |
|
(22 |
) | ||
Net of taxes |
|
86 |
|
(51 |
) | ||
|
|
|
|
|
| ||
Total other comprehensive income (loss) |
|
631 |
|
(1,842 |
) | ||
Total income tax expense (benefit) |
|
196 |
|
(636 |
) | ||
Total other comprehensive income (loss), net of taxes |
|
$ |
435 |
|
$ |
(1,206 |
) |
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued
(for the six months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Changes in net unrealized gains on investment securities: |
|
|
|
|
| ||
Having no credit losses recognized in the consolidated statement of income |
|
$ |
1,055 |
|
$ |
(2,166 |
) |
Income tax expense (benefit) |
|
366 |
|
(752 |
) | ||
Net of taxes |
|
689 |
|
(1,414 |
) | ||
|
|
|
|
|
| ||
Having credit losses recognized in the consolidated statement of income |
|
3 |
|
4 |
| ||
Income tax expense |
|
1 |
|
1 |
| ||
Net of taxes |
|
2 |
|
3 |
| ||
|
|
|
|
|
| ||
Net changes in benefit plan assets and obligations |
|
30 |
|
54 |
| ||
Income tax expense |
|
12 |
|
19 |
| ||
Net of taxes |
|
18 |
|
35 |
| ||
|
|
|
|
|
| ||
Net changes in unrealized foreign currency translation |
|
54 |
|
(169 |
) | ||
Income tax expense (benefit) |
|
11 |
|
(29 |
) | ||
Net of taxes |
|
43 |
|
(140 |
) | ||
|
|
|
|
|
| ||
Total other comprehensive income (loss) |
|
1,142 |
|
(2,277 |
) | ||
Total income tax expense (benefit) |
|
390 |
|
(761 |
) | ||
Total other comprehensive income (loss), net of taxes |
|
$ |
752 |
|
$ |
(1,516 |
) |
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued
The following tables present the pretax and related income tax expense (benefit) components of the amounts reclassified from the Companys AOCI to the Companys consolidated statement of income for the three months and six months ended June 30, 2014 and 2013.
(for the three months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
|
|
|
|
|
| ||
Reclassification adjustments related to unrealized gains on investment securities: |
|
|
|
|
| ||
Having no credit losses recognized in the consolidated statement of income (1) |
|
$ |
(24 |
) |
$ |
(34 |
) |
Income tax expense (2) |
|
(8 |
) |
(12 |
) | ||
Net of taxes |
|
(16 |
) |
(22 |
) | ||
|
|
|
|
|
| ||
Having credit losses recognized in the consolidated statement of income (1) |
|
1 |
|
1 |
| ||
Income tax benefit (2) |
|
1 |
|
1 |
| ||
Net of taxes |
|
|
|
|
| ||
|
|
|
|
|
| ||
Reclassification adjustment related to benefit plan assets and obligations (3) |
|
15 |
|
25 |
| ||
Income tax benefit (2) |
|
5 |
|
8 |
| ||
Net of taxes |
|
10 |
|
17 |
| ||
|
|
|
|
|
| ||
Reclassification adjustment related to foreign currency translation (1) |
|
|
|
|
| ||
Income tax benefit (2) |
|
|
|
|
| ||
Net of taxes |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total reclassifications |
|
(8 |
) |
(8 |
) | ||
Total income tax (expense) benefit |
|
(2 |
) |
(3 |
) | ||
Total reclassifications, net of taxes |
|
$ |
(6 |
) |
$ |
(5 |
) |
(1) (Increases) decreases net realized investment gains on the consolidated statement of income.
(2) (Increases) decreases income tax expense on the consolidated statement of income.
(3) Increases (decreases) general and administrative expenses on the consolidated statement of income.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
6. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued
(for the six months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
Reclassification adjustments related to unrealized gains on investment securities: |
|
|
|
|
| ||
Having no credit losses recognized in the consolidated statement of income (1) |
|
$ |
(29 |
) |
$ |
(51 |
) |
Income tax expense (2) |
|
(10 |
) |
(18 |
) | ||
Net of taxes |
|
(19 |
) |
(33 |
) | ||
|
|
|
|
|
| ||
Having credit losses recognized in the consolidated statement of income (1) |
|
4 |
|
2 |
| ||
Income tax benefit (2) |
|
2 |
|
1 |
| ||
Net of taxes |
|
2 |
|
1 |
| ||
|
|
|
|
|
| ||
Reclassification adjustment related to benefit plan assets and obligations (3) |
|
30 |
|
52 |
| ||
Income tax benefit (2) |
|
12 |
|
18 |
| ||
Net of taxes |
|
18 |
|
34 |
| ||
|
|
|
|
|
| ||
Reclassification adjustment related to foreign currency translation (1) |
|
|
|
(3 |
) | ||
Income tax benefit (2) |
|
|
|
|
| ||
Net of taxes |
|
|
|
(3 |
) | ||
|
|
|
|
|
| ||
Total reclassifications |
|
5 |
|
|
| ||
Total income tax benefit |
|
4 |
|
1 |
| ||
Total reclassifications, net of taxes |
|
$ |
1 |
|
$ |
(1 |
) |
(1) (Increases) decreases net realized investment gains on the consolidated statement of income.
(2) (Increases) decreases income tax expense on the consolidated statement of income.
(3) Increases (decreases) general and administrative expenses on the consolidated statement of income.
7. COMMON SHARE REPURCHASES
During the three months and six months ended June 30, 2014, the Company repurchased 9.5 million and 17.3 million shares, respectively, under its share repurchase authorization, for a total cost of $875 million and $1.53 billion, respectively. The average cost per share repurchased was $92.67 and $88.27, respectively. At June 30, 2014, the Company had $3.23 billion of capacity remaining under the share repurchase authorization.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
8. EARNINGS PER SHARE
The following is a reconciliation of the net income and share data used in the basic and diluted earnings per share computations for the periods presented:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions, except per share amounts) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic and Diluted |
|
|
|
|
|
|
|
|
| ||||
Net income, as reported |
|
$ |
683 |
|
$ |
925 |
|
$ |
1,735 |
|
$ |
1,821 |
|
Participating share-based awards allocated income |
|
(5 |
) |
(7 |
) |
(12 |
) |
(14 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available to common shareholders basic and diluted |
|
$ |
678 |
|
$ |
918 |
|
$ |
1,723 |
|
$ |
1,807 |
|
|
|
|
|
|
|
|
|
|
| ||||
Common Shares |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding |
|
343.0 |
|
375.9 |
|
346.9 |
|
376.8 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding |
|
343.0 |
|
375.9 |
|
346.9 |
|
376.8 |
| ||||
Weighted average effects of dilutive securities stock options and performance shares |
|
3.7 |
|
4.0 |
|
3.6 |
|
4.0 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total |
|
346.7 |
|
379.9 |
|
350.5 |
|
380.8 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income per Common Share |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
1.98 |
|
$ |
2.44 |
|
$ |
4.97 |
|
$ |
4.80 |
|
Diluted |
|
$ |
1.95 |
|
$ |
2.41 |
|
$ |
4.91 |
|
$ |
4.75 |
|
9. SHARE-BASED INCENTIVE COMPENSATION
The following information relates to fully vested stock option awards at June 30, 2014:
Stock Options |
|
Number |
|
Weighted |
|
Weighted |
|
Aggregate |
| ||
Vested at end of period (1) |
|
7,967,953 |
|
$ |
58.07 |
|
6.1 years |
|
$ |
287 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable at end of period |
|
5,137,812 |
|
$ |
50.32 |
|
4.7 years |
|
$ |
225 |
|
(1) Represents awards for which the requisite service has been rendered, including those that are retirement eligible.
The total compensation cost for all share-based incentive compensation awards recognized in earnings was $31 million and $29 million for the three months ended June 30, 2014 and 2013, respectively, and $75 million and $70 million for the six months ended June 30, 2014 and 2013, respectively. The related tax benefits recognized in the consolidated statement of income were $11 million and $10 million for the three months ended June 30, 2014 and 2013, respectively, and $26 million and $24 million for the six months ended June 30, 2014 and 2013, respectively.
The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at June 30, 2014 was $180 million, which is expected to be recognized over a weighted-average period of 2.0 years. The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at December 31, 2013 was $120 million, which was expected to be recognized over a weighted-average period of 1.7 years.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
9. SHARE-BASED INCENTIVE COMPENSATION, Continued
In February 2014, the Companys board of directors approved The Travelers Companies, Inc. 2014 Stock Incentive Plan (2014 Incentive Plan) to replace, effective with shareholder approval, the Amended and Restated 2004 Stock Incentive Plan (2004 Incentive Plan), which was scheduled to expire in July 2014. At the Companys 2014 Annual Meeting of Shareholders on May 27, 2014, the shareholders approved the 2014 Incentive Plan. Accordingly, the 2014 Incentive Plan became effective on that date and no further awards will be made under the 2004 Incentive Plan. The 2014 Incentive Plan has substantially the same terms, other than the number of shares available, as the 2004 Incentive Plan and is effective through February 5, 2024. The number of shares initially available for issuance under the 2014 Incentive Plan was 10,000,000 shares of common stock. Shares of common stock subject to an award granted under the 2014 Incentive Plan or the prior 2004 Incentive Plan that expire unexercised, are forfeited, terminated or canceled and that do not result in the issuance of common stock, will be available for grant under the 2014 Incentive Plan.
10. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS
The following tables summarize the components of net periodic benefit cost for the Companys pension and postretirement benefit plans recognized in the consolidated statement of income.
|
|
Pension Plans |
|
Postretirement Benefit Plans |
| ||||||||
(for the three months ended June 30, in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
28 |
|
$ |
30 |
|
$ |
|
|
$ |
|
|
Interest cost on benefit obligation |
|
37 |
|
33 |
|
3 |
|
2 |
| ||||
Expected return on plan assets |
|
(55 |
) |
(52 |
) |
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Prior service benefit |
|
|
|
|
|
|
|
(1 |
) | ||||
Net actuarial (gain) loss |
|
16 |
|
26 |
|
(1 |
) |
|
| ||||
Net periodic benefit cost |
|
$ |
26 |
|
$ |
37 |
|
$ |
2 |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
Pension Plans |
|
Postretirement Benefit Plans |
| ||||||||
(for the six months ended June 30, in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
$ |
55 |
|
$ |
59 |
|
$ |
|
|
$ |
|
|
Interest cost on benefit obligation |
|
75 |
|
66 |
|
5 |
|
4 |
| ||||
Expected return on plan assets |
|
(109 |
) |
(104 |
) |
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Prior service benefit |
|
|
|
|
|
(1 |
) |
(1 |
) | ||||
Net actuarial (gain) loss |
|
32 |
|
53 |
|
(1 |
) |
|
| ||||
Net periodic benefit cost |
|
$ |
53 |
|
$ |
74 |
|
$ |
3 |
|
$ |
3 |
|
11. CONTINGENCIES, COMMITMENTS AND GUARANTEES
Contingencies
The major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of the Companys properties is subject are described below.
Asbestos- and Environmental-Related Proceedings
In the ordinary course of its insurance business, the Company has received and continues to receive claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation, including, among others, the litigation described below. The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued
defenses; however, the outcomes of these disputes are uncertain. In this regard, the Company employs dedicated specialists and aggressive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances.
Asbestos Direct Action Litigation In October 2001 and April 2002, two purported class action suits (Wise v. Travelers and Meninger v. Travelers) were filed against Travelers Property Casualty Corp. (TPC), a wholly-owned subsidiary of the Company, and other insurers (not including The St. Paul Companies, Inc. (SPC), which was acquired by TPC in 2004) in state court in West Virginia. These and other cases subsequently filed in West Virginia were consolidated into a single proceeding in the Circuit Court of Kanawha County, West Virginia. The plaintiffs allege that the insurer defendants engaged in unfair trade practices in violation of state statutes by inappropriately handling and settling asbestos claims. The plaintiffs seek to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers. Similar lawsuits alleging inappropriate handling and settling of asbestos claims were filed in Massachusetts and Hawaii state courts. These suits are collectively referred to as the Statutory and Hawaii Actions.
In March 2002, the plaintiffs in consolidated asbestos actions pending before a mass tort panel of judges in West Virginia state court amended their complaint to include TPC as a defendant, alleging that TPC and other insurers breached alleged duties to certain users of asbestos products. The plaintiffs seek damages, including punitive damages. Lawsuits seeking similar relief and raising similar allegations, primarily violations of purported common law duties to third parties, have also been asserted in various state courts against TPC and SPC. The claims asserted in these suits are collectively referred to as the Common Law Claims.
In response to these claims, TPC moved to enjoin the Statutory Actions and the Common Law Claims in the federal bankruptcy court that had presided over the bankruptcy of TPCs former policyholder Johns-Manville Corporation on the ground that the suits violated injunctions entered in connection with confirmation of the Johns-Manville bankruptcy (the 1986 Orders). The bankruptcy court issued a temporary restraining order and referred the parties to mediation. In November 2003, the parties reached a settlement of the Statutory and Hawaii Actions, which included a lump-sum payment of up to $412 million by TPC, subject to a number of significant contingencies. In May 2004, the parties reached a settlement resolving substantially all pending and similar future Common Law Claims against TPC, which included a payment of up to $90 million by TPC, subject to similar contingencies. Among the contingencies for each of these settlements was that the bankruptcy court issue an order, which must become a final order, clarifying that all of these claims, and similar future asbestos-related claims against TPC, as well as related contribution claims, are barred by the 1986 Orders.
On August 17, 2004, the bankruptcy court entered an order approving the settlements and clarifying that the 1986 Orders barred the pending Statutory and Hawaii Actions and substantially all Common Law Claims pending against TPC (the Clarifying Order). The Clarifying Order also applies to similar direct action claims that may be filed in the future. Although the District Court substantially affirmed the Clarifying Order, on February 15, 2008, the Second Circuit issued an opinion vacating on jurisdictional grounds the District Courts approval of the Clarifying Order.
On December 12, 2008, the United States Supreme Court granted TPCs Petition for Writ of Certiorari and, on June 18, 2009, the Supreme Court reversed the Second Circuits February 15, 2008 decision, finding, among other things, that the 1986 Orders are final and therefore may not be collaterally challenged on jurisdictional grounds. The Supreme Court further ruled that the bankruptcy court had jurisdiction to issue the Clarifying Order. However, since the Second Circuit had not ruled on certain additional issues, principally related to procedural matters and the adequacy of notice provided to certain parties, the Supreme Court remanded the case to the Second Circuit for further proceedings on those specific issues.
On March 22, 2010, the Second Circuit issued an opinion in which it found that the notice of the 1986 Orders provided to one remaining objector was insufficient to bar contribution claims by that objector against TPC. TPCs Petition for Rehearing and Rehearing En Banc was denied May 25, 2010 and its Petition for Writ of Certiorari and Petition for a Writ of Mandamus were denied by the United States Supreme Court on November 29, 2010.
The plaintiffs in the Statutory and Hawaii actions and the Common Law Claims actions thereafter filed motions in the bankruptcy court to compel TPC to make payment under the settlement agreements, arguing that all conditions precedent to
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued
the settlements had been met. On December 16, 2010, the bankruptcy court granted the plaintiffs motions and ruled that TPC was required to fund the settlements. The court entered judgment against TPC on January 20, 2011 in accordance with this ruling and ordered TPC to pay the settlement amounts plus prejudgment interest. The bankruptcy courts judgment was reversed by the district court on March 1, 2012, the district court having found that the conditions to the settlements had not been met in view of the Second Circuits March 22, 2010 ruling permitting the filing of contribution claims against TPC. The plaintiffs appealed the district courts March 1, 2012 decision to the Second Circuit Court of Appeals. Oral argument before the Second Circuit took place on January 10, 2013, and the parties await the courts decision.
SPC, which is not covered by the Manville bankruptcy court rulings or the settlements described above, from time to time has been named as a defendant in direct action cases in Texas state court asserting common law claims. All such cases that are still pending and in which SPC has been served are currently on the inactive docket in Texas state court. If any of those cases becomes active, SPC intends to litigate those cases vigorously. SPC was previously a defendant in similar direct actions in Ohio state court, which have been dismissed following favorable rulings by Ohio trial and appellate courts. From time to time, SPC and/or its subsidiaries have been named in similar individual direct actions in other jurisdictions.
Outcome and Impact of Asbestos and Environmental Claims and Litigation. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims and litigation relating to asbestos and environmental claims. Any such development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Companys current reserves. In addition, the Companys estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Companys results of operations in future periods.
Other Proceedings Not Arising Under Insurance Contracts or Reinsurance Agreements
The Company is involved in other lawsuits, including lawsuits alleging extra-contractual damages relating to insurance contracts or reinsurance agreements, that do not arise under insurance contracts or reinsurance agreements. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Companys results of operations or would have a material adverse effect on the Companys financial position or liquidity.
Gain Contingency
On August 17, 2010, in a reinsurance dispute in New York state court captioned United States Fidelity & Guaranty Company v. American Re-Insurance Company, et al., the trial court granted summary judgment for United States Fidelity and Guaranty Company (USF&G), a subsidiary of the Company, and denied summary judgment for American Re-Insurance Company, a subsidiary of Munich Re (American Re), and three other reinsurers. By order dated October 22, 2010, the trial court corrected certain clerical errors and made certain clarifications to the August 17, 2010 order. On October 25, 2010, judgment was entered against American Re and the other three insurers, awarding USF&G $420 million, comprising $251 million ceded under the terms of the disputed reinsurance contract plus interest of 9% amounting to $169 million as of that date. The judgment, including the award of interest, was appealed by the reinsurers to the New York Supreme Court, Appellate Division, First Department. On January 24, 2012, the Appellate Division affirmed the judgment. On January 30, 2012, the reinsurers filed a motion with the Appellate Division seeking permission to appeal its decision to the New York Court of Appeals, and on March 12, 2012, the Appellate Division granted the reinsurers motion. On February 7, 2013, the Court of Appeals issued an opinion that largely affirmed the summary judgment in USF&Gs favor, while modifying in part the summary judgment with respect to two discrete issues and remanding the case to the trial court for determination of those issues. The Company believes it has a meritorious position on each of these issues and intends to pursue its claim vigorously. On May 2, 2013, the Court of Appeals denied a motion by reinsurers to reconsider the February 7, 2013 opinion. In November 2013, the Company entered into a settlement agreement with one of the reinsurers. At June 30, 2014, the claim totaled $477 million, comprising the $238 million of reinsurance recoverable plus interest amounting to $239 million as of that date. Interest will continue to accrue at 9% until the claim is paid. The $238 million of reinsurance recoverable owed to USF&G under the terms of the disputed reinsurance contract has been reported as part of reinsurance recoverables in the Companys consolidated balance sheet. The interest that would be owed as part of any judgment ultimately entered in favor of USF&G is treated for accounting purposes as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly has not been recognized in the Companys consolidated financial statements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
11. CONTINGENCIES, COMMITMENTS AND GUARANTEES, Continued
Other Commitments and Guarantees
Commitments
Investment Commitments The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.59 billion and $1.52 billion at June 30, 2014 and December 31, 2013, respectively.
Guarantees
In the ordinary course of selling businesses to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the businesses being sold, covenants and obligations of the Company and/or its subsidiaries following the closing, and in certain cases obligations arising from undisclosed liabilities, adverse reserve development and imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law. Such indemnification provisions generally are applicable from the closing date to the expiration of the relevant statutes of limitations, although, in some cases, there may be agreed upon term limitations or no term limitations. Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments. The maximum amount of the Companys contingent obligation for indemnifications related to the sale of businesses that are quantifiable was $467 million at June 30, 2014, of which $9 million was recognized on the balance sheet at that date.
The Company also has contingent obligations for guarantees related to certain investments, third-party loans related to certain investments, certain insurance policy obligations of former insurance subsidiaries, and various other indemnifications. The Company also provides standard indemnifications to service providers in the normal course of business. The indemnification clauses are often standard contractual terms. Certain of these guarantees and indemnifications have no stated or notional amounts or limitation to the maximum potential future payments, and, accordingly, the Company is unable to develop an estimate of the maximum potential payments for such arrangements. The maximum amount of the Companys obligation for guarantees of certain investments and third-party loans related to certain investments that are quantifiable was $150 million at June 30, 2014, approximately $75 million of which is indemnified by a third party. The maximum amount of the Companys obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at June 30, 2014, all of which is indemnified by a third party.
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
The following consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X. These consolidating financial statements have been prepared from the Companys financial information on the same basis of accounting as the consolidated financial statements. The Travelers Companies, Inc. has fully and unconditionally guaranteed certain debt obligations of TPC, which totaled $700 million at June 30, 2014.
Prior to the merger of TPC and SPC in 2004, TPC fully and unconditionally guaranteed the payment of all principal, premiums, if any, and interest on certain debt obligations of its wholly-owned subsidiary, Travelers Insurance Group Holdings, Inc. (TIGHI). Concurrent with the merger, The Travelers Companies, Inc. fully and unconditionally assumed such guarantee obligations of TPC. TPC is deemed to have no assets or operations independent of TIGHI. Consolidating financial information for TIGHI has not been presented herein because such financial information would be substantially the same as the financial information provided for TPC.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the three months ended June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
| |||||
Premiums |
|
$ |
4,020 |
|
$ |
1,908 |
|
$ |
|
|
$ |
|
|
$ |
5,928 |
|
Net investment income |
|
472 |
|
221 |
|
2 |
|
|
|
695 |
| |||||
Fee income |
|
111 |
|
1 |
|
|
|
|
|
112 |
| |||||
Net realized investment gains (1) |
|
5 |
|
11 |
|
|
|
|
|
16 |
| |||||
Other revenues |
|
32 |
|
2 |
|
|
|
|
|
34 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
4,640 |
|
2,143 |
|
2 |
|
|
|
6,785 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and expenses |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expenses |
|
2,569 |
|
1,257 |
|
|
|
|
|
3,826 |
| |||||
Amortization of deferred acquisition costs |
|
650 |
|
315 |
|
|
|
|
|
965 |
| |||||
General and administrative expenses |
|
697 |
|
300 |
|
4 |
|
|
|
1,001 |
| |||||
Interest expense |
|
12 |
|
|
|
80 |
|
|
|
92 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total claims and expenses |
|
3,928 |
|
1,872 |
|
84 |
|
|
|
5,884 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) before income taxes |
|
712 |
|
271 |
|
(82 |
) |
|
|
901 |
| |||||
Income tax expense (benefit) |
|
186 |
|
60 |
|
(28 |
) |
|
|
218 |
| |||||
Net income of subsidiaries |
|
|
|
|
|
737 |
|
(737 |
) |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
526 |
|
$ |
211 |
|
$ |
683 |
|
$ |
(737 |
) |
$ |
683 |
|
(1) Total other-than-temporary impairment (OTTI) for the three months ended June 30, 2014, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (OCI) were as follows:
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total OTTI gains (losses) |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
OTTI losses recognized in net realized investment gains |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
OTTI gains recognized in OCI |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
(2) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the three months ended June 30, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
| |||||
Premiums |
|
$ |
3,804 |
|
$ |
1,799 |
|
$ |
|
|
$ |
|
|
$ |
5,603 |
|
Net investment income |
|
457 |
|
229 |
|
1 |
|
|
|
687 |
| |||||
Fee income |
|
82 |
|
|
|
|
|
|
|
82 |
| |||||
Net realized investment gains (1) |
|
124 |
|
43 |
|
|
|
|
|
167 |
| |||||
Other revenues |
|
103 |
|
32 |
|
|
|
|
|
135 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
4,570 |
|
2,103 |
|
1 |
|
|
|
6,674 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and expenses |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expenses |
|
2,339 |
|
1,191 |
|
|
|
|
|
3,530 |
| |||||
Amortization of deferred acquisition costs |
|
635 |
|
315 |
|
|
|
|
|
950 |
| |||||
General and administrative expenses |
|
639 |
|
289 |
|
3 |
|
|
|
931 |
| |||||
Interest expense |
|
12 |
|
|
|
74 |
|
|
|
86 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total claims and expenses |
|
3,625 |
|
1,795 |
|
77 |
|
|
|
5,497 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) before income taxes |
|
945 |
|
308 |
|
(76 |
) |
|
|
1,177 |
| |||||
Income tax expense (benefit) |
|
203 |
|
77 |
|
(28 |
) |
|
|
252 |
| |||||
Net income of subsidiaries |
|
|
|
|
|
973 |
|
(973 |
) |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
742 |
|
$ |
231 |
|
$ |
925 |
|
$ |
(973 |
) |
$ |
925 |
|
(1) Total other-than-temporary impairment (OTTI) for the three months ended June 30, 2013, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (OCI) were as follows:
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total OTTI gains (losses) |
|
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
OTTI losses recognized in net realized investment gains |
|
$ |
(1 |
) |
$ |
(1 |
) |
$ |
|
|
$ |
|
|
$ |
(2 |
) |
OTTI gains recognized in OCI |
|
$ |
|
|
$ |
1 |
|
$ |
|
|
$ |
|
|
$ |
1 |
|
(2) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the six months ended June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
| |||||
Premiums |
|
$ |
7,964 |
|
$ |
3,787 |
|
$ |
|
|
$ |
|
|
$ |
11,751 |
|
Net investment income |
|
972 |
|
456 |
|
3 |
|
|
|
1,431 |
| |||||
Fee income |
|
218 |
|
1 |
|
|
|
|
|
219 |
| |||||
Net realized investment gains (1) |
|
6 |
|
9 |
|
2 |
|
|
|
17 |
| |||||
Other revenues |
|
65 |
|
10 |
|
|
|
|
|
75 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
9,225 |
|
4,263 |
|
5 |
|
|
|
13,493 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and expenses |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expenses |
|
4,790 |
|
2,351 |
|
|
|
|
|
7,141 |
| |||||
Amortization of deferred acquisition costs |
|
1,285 |
|
630 |
|
|
|
|
|
1,915 |
| |||||
General and administrative expenses |
|
1,310 |
|
565 |
|
7 |
|
|
|
1,882 |
| |||||
Interest expense |
|
24 |
|
|
|
160 |
|
|
|
184 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total claims and expenses |
|
7,409 |
|
3,546 |
|
167 |
|
|
|
11,122 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) before income taxes |
|
1,816 |
|
717 |
|
(162 |
) |
|
|
2,371 |
| |||||
Income tax expense (benefit) |
|
507 |
|
185 |
|
(56 |
) |
|
|
636 |
| |||||
Net income of subsidiaries |
|
|
|
|
|
1,841 |
|
(1,841 |
) |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,309 |
|
$ |
532 |
|
$ |
1,735 |
|
$ |
(1,841 |
) |
$ |
1,735 |
|
(1) Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2014, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI) were as follows:
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total OTTI gains |
|
$ |
(3 |
) |
$ |
(5 |
) |
$ |
|
|
$ |
|
|
$ |
(8 |
) |
OTTI losses recognized in net realized investment gains (losses) |
|
$ |
(5 |
) |
$ |
(5 |
) |
$ |
|
|
$ |
|
|
$ |
(10 |
) |
OTTI gains recognized in OCI |
|
$ |
2 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
2 |
|
(2) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the six months ended June 30, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
Revenues |
|
|
|
|
|
|
|
|
|
|
| |||||
Premiums |
|
$ |
7,545 |
|
$ |
3,575 |
|
$ |
|
|
$ |
|
|
$ |
11,120 |
|
Net investment income |
|
912 |
|
442 |
|
3 |
|
|
|
1,357 |
| |||||
Fee income |
|
178 |
|
1 |
|
|
|
|
|
179 |
| |||||
Net realized investment gains (1) |
|
117 |
|
59 |
|
1 |
|
|
|
177 |
| |||||
Other revenues |
|
132 |
|
37 |
|
|
|
|
|
169 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total revenues |
|
8,884 |
|
4,114 |
|
4 |
|
|
|
13,002 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and expenses |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expenses |
|
4,470 |
|
2,213 |
|
|
|
|
|
6,683 |
| |||||
Amortization of deferred acquisition costs |
|
1,272 |
|
626 |
|
|
|
|
|
1,898 |
| |||||
General and administrative expenses |
|
1,269 |
|
575 |
|
2 |
|
|
|
1,846 |
| |||||
Interest expense |
|
29 |
|
|
|
149 |
|
|
|
178 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total claims and expenses |
|
7,040 |
|
3,414 |
|
151 |
|
|
|
10,605 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) before income taxes |
|
1,844 |
|
700 |
|
(147 |
) |
|
|
2,397 |
| |||||
Income tax expense (benefit) |
|
452 |
|
176 |
|
(52 |
) |
|
|
576 |
| |||||
Net income of subsidiaries |
|
|
|
|
|
1,916 |
|
(1,916 |
) |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,392 |
|
$ |
524 |
|
$ |
1,821 |
|
$ |
(1,916 |
) |
$ |
1,821 |
|
(1) Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2013, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (OCI) were as follows:
(in millions) |
|
TPC |
|
Other |
|
Travelers (2) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total OTTI gains (losses) |
|
$ |
(4 |
) |
$ |
3 |
|
$ |
|
|
$ |
|
|
$ |
(1 |
) |
OTTI losses recognized in net realized investment gains |
|
$ |
(5 |
) |
$ |
(2 |
) |
$ |
|
|
$ |
|
|
$ |
(7 |
) |
OTTI gains recognized in OCI |
|
$ |
1 |
|
$ |
5 |
|
$ |
|
|
$ |
|
|
$ |
6 |
|
(2) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the three months ended June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
526 |
|
$ |
211 |
|
$ |
683 |
|
$ |
(737 |
) |
$ |
683 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Changes in net unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Having no credit losses recognized in the consolidated statement of income |
|
359 |
|
155 |
|
4 |
|
|
|
518 |
| |||||
Having credit losses recognized in the consolidated statement of income |
|
2 |
|
(1 |
) |
|
|
|
|
1 |
| |||||
Net changes in benefit plan assets and obligations |
|
|
|
|
|
15 |
|
|
|
15 |
| |||||
Net changes in unrealized foreign currency translation |
|
51 |
|
46 |
|
|
|
|
|
97 |
| |||||
Other comprehensive income before income taxes and other comprehensive income of subsidiaries |
|
412 |
|
200 |
|
19 |
|
|
|
631 |
| |||||
Income tax expense |
|
129 |
|
61 |
|
6 |
|
|
|
196 |
| |||||
Other comprehensive income net of taxes, before other comprehensive income of subsidiaries |
|
283 |
|
139 |
|
13 |
|
|
|
435 |
| |||||
Other comprehensive income of subsidiaries |
|
|
|
|
|
422 |
|
(422 |
) |
|
| |||||
Other comprehensive income |
|
283 |
|
139 |
|
435 |
|
(422 |
) |
435 |
| |||||
Comprehensive income |
|
$ |
809 |
|
$ |
350 |
|
$ |
1,118 |
|
$ |
(1,159 |
) |
$ |
1,118 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
For the three months ended June 30, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
742 |
|
$ |
231 |
|
$ |
925 |
|
$ |
(973 |
) |
$ |
925 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
| |||||
Changes in net unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Having no credit losses recognized in the consolidated statement of income |
|
(1,282 |
) |
(509 |
) |
1 |
|
|
|
(1,790 |
) | |||||
Having credit losses recognized in the consolidated statement of income |
|
(2 |
) |
(3 |
) |
|
|
|
|
(5 |
) | |||||
Net changes in benefit plan assets and obligations |
|
|
|
1 |
|
25 |
|
|
|
26 |
| |||||
Net changes in unrealized foreign currency translation |
|
(51 |
) |
(22 |
) |
|
|
|
|
(73 |
) | |||||
Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries |
|
(1,335 |
) |
(533 |
) |
26 |
|
|
|
(1,842 |
) | |||||
Income tax expense (benefit) |
|
(462 |
) |
(183 |
) |
9 |
|
|
|
(636 |
) | |||||
Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries |
|
(873 |
) |
(350 |
) |
17 |
|
|
|
(1,206 |
) | |||||
Other comprehensive loss of subsidiaries |
|
|
|
|
|
(1,223 |
) |
1,223 |
|
|
| |||||
Other comprehensive loss |
|
(873 |
) |
(350 |
) |
(1,206 |
) |
1,223 |
|
(1,206 |
) | |||||
Comprehensive loss |
|
$ |
(131 |
) |
$ |
(119 |
) |
$ |
(281 |
) |
$ |
250 |
|
$ |
(281 |
) |
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the six months ended June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,309 |
|
$ |
532 |
|
$ |
1,735 |
|
$ |
(1,841 |
) |
$ |
1,735 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
| |||||
Changes in net unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Having no credit losses recognized in the consolidated statement of income |
|
750 |
|
301 |
|
4 |
|
|
|
1,055 |
| |||||
Having credit losses recognized in the consolidated statement of income |
|
9 |
|
(6 |
) |
|
|
|
|
3 |
| |||||
Net changes in benefit plan assets and obligations |
|
|
|
|
|
30 |
|
|
|
30 |
| |||||
Net changes in unrealized foreign currency translation |
|
26 |
|
28 |
|
|
|
|
|
54 |
| |||||
Other comprehensive income before income taxes and other comprehensive income of subsidiaries |
|
785 |
|
323 |
|
34 |
|
|
|
1,142 |
| |||||
Income tax expense |
|
272 |
|
106 |
|
12 |
|
|
|
390 |
| |||||
Other comprehensive income, net of taxes, before other comprehensive income of subsidiaries |
|
513 |
|
217 |
|
22 |
|
|
|
752 |
| |||||
Other comprehensive income of subsidiaries |
|
|
|
|
|
730 |
|
(730 |
) |
|
| |||||
Other comprehensive income |
|
513 |
|
217 |
|
752 |
|
(730 |
) |
752 |
| |||||
Comprehensive income |
|
$ |
1,822 |
|
$ |
749 |
|
$ |
2,487 |
|
$ |
(2,571 |
) |
$ |
2,487 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the six months ended June 30, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,392 |
|
$ |
524 |
|
$ |
1,821 |
|
$ |
(1,916 |
) |
$ |
1,821 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
| |||||
Changes in net unrealized gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Having no credit losses recognized in the consolidated statement of income |
|
(1,597 |
) |
(576 |
) |
7 |
|
|
|
(2,166 |
) | |||||
Having credit losses recognized in the consolidated statement of income |
|
5 |
|
(1 |
) |
|
|
|
|
4 |
| |||||
Net changes in benefit plan assets and obligations |
|
1 |
|
3 |
|
50 |
|
|
|
54 |
| |||||
Net changes in unrealized foreign currency translation |
|
(61 |
) |
(108 |
) |
|
|
|
|
(169 |
) | |||||
Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries |
|
(1,652 |
) |
(682 |
) |
57 |
|
|
|
(2,277 |
) | |||||
Income tax expense (benefit) |
|
(570 |
) |
(211 |
) |
20 |
|
|
|
(761 |
) | |||||
Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries |
|
(1,082 |
) |
(471 |
) |
37 |
|
|
|
(1,516 |
) | |||||
Other comprehensive loss of subsidiaries |
|
|
|
|
|
(1,553 |
) |
1,553 |
|
|
| |||||
Other comprehensive loss |
|
(1,082 |
) |
(471 |
) |
(1,516 |
) |
1,553 |
|
(1,516 |
) | |||||
Comprehensive income |
|
$ |
310 |
|
$ |
53 |
|
$ |
305 |
|
$ |
(363 |
) |
$ |
305 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING BALANCE SHEET (Unaudited)
At June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities, available for sale, at fair value (amortized cost $61,841) |
|
$ |
44,292 |
|
$ |
20,251 |
|
$ |
40 |
|
$ |
|
|
$ |
64,583 |
|
Equity securities, available for sale, at fair value (cost $648) |
|
302 |
|
541 |
|
137 |
|
|
|
980 |
| |||||
Real estate investments |
|
55 |
|
899 |
|
|
|
|
|
954 |
| |||||
Short-term securities |
|
1,516 |
|
539 |
|
1,763 |
|
|
|
3,818 |
| |||||
Other investments |
|
2,607 |
|
998 |
|
1 |
|
|
|
3,606 |
| |||||
Total investments |
|
48,772 |
|
23,228 |
|
1,941 |
|
|
|
73,941 |
| |||||
Cash |
|
167 |
|
143 |
|
1 |
|
|
|
311 |
| |||||
Investment income accrued |
|
483 |
|
223 |
|
4 |
|
|
|
710 |
| |||||
Premiums receivable |
|
4,400 |
|
2,189 |
|
|
|
|
|
6,589 |
| |||||
Reinsurance recoverables |
|
6,250 |
|
3,258 |
|
|
|
|
|
9,508 |
| |||||
Ceded unearned premiums |
|
637 |
|
125 |
|
|
|
|
|
762 |
| |||||
Deferred acquisition costs |
|
1,621 |
|
258 |
|
|
|
|
|
1,879 |
| |||||
Contractholder receivables |
|
3,264 |
|
1,107 |
|
|
|
|
|
4,371 |
| |||||
Goodwill |
|
2,619 |
|
1,015 |
|
|
|
|
|
3,634 |
| |||||
Other intangible assets |
|
234 |
|
94 |
|
|
|
|
|
328 |
| |||||
Investment in subsidiaries |
|
|
|
|
|
29,105 |
|
(29,105 |
) |
|
| |||||
Other assets |
|
2,180 |
|
90 |
|
508 |
|
|
|
2,778 |
| |||||
Total assets |
|
$ |
70,627 |
|
$ |
31,730 |
|
$ |
31,559 |
|
$ |
(29,105 |
) |
$ |
104,811 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expense reserves |
|
$ |
33,569 |
|
$ |
17,287 |
|
$ |
|
|
$ |
|
|
$ |
50,856 |
|
Unearned premium reserves |
|
8,301 |
|
3,788 |
|
|
|
|
|
12,089 |
| |||||
Contractholder payables |
|
3,264 |
|
1,107 |
|
|
|
|
|
4,371 |
| |||||
Payables for reinsurance premiums |
|
224 |
|
173 |
|
|
|
|
|
397 |
| |||||
Deferred taxes |
|
109 |
|
73 |
|
57 |
|
|
|
239 |
| |||||
Debt |
|
692 |
|
|
|
5,655 |
|
|
|
6,347 |
| |||||
Other liabilities |
|
3,899 |
|
753 |
|
328 |
|
|
|
4,980 |
| |||||
Total liabilities |
|
50,058 |
|
23,181 |
|
6,040 |
|
|
|
79,279 |
| |||||
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock (1,750.0 shares authorized; 339.0 shares issued and outstanding) |
|
|
|
390 |
|
21,694 |
|
(390 |
) |
21,694 |
| |||||
Additional paid-in capital |
|
11,634 |
|
6,502 |
|
|
|
(18,136 |
) |
|
| |||||
Retained earnings |
|
7,655 |
|
1,017 |
|
25,649 |
|
(8,659 |
) |
25,662 |
| |||||
Accumulated other comprehensive income |
|
1,280 |
|
640 |
|
1,562 |
|
(1,920 |
) |
1,562 |
| |||||
Treasury stock, at cost (419.5 shares) |
|
|
|
|
|
(23,386 |
) |
|
|
(23,386 |
) | |||||
Total shareholders equity |
|
20,569 |
|
8,549 |
|
25,519 |
|
(29,105 |
) |
25,532 |
| |||||
Total liabilities and shareholders equity |
|
$ |
70,627 |
|
$ |
31,730 |
|
$ |
31,559 |
|
$ |
(29,105 |
) |
$ |
104,811 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES (Continued)
CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities, available for sale, at fair value (amortized cost $62,196) |
|
$ |
43,720 |
|
$ |
20,199 |
|
$ |
37 |
|
$ |
|
|
$ |
63,956 |
|
Equity securities, available for sale, at fair value (cost $686) |
|
329 |
|
484 |
|
130 |
|
|
|
943 |
| |||||
Real estate investments |
|
33 |
|
905 |
|
|
|
|
|
938 |
| |||||
Short-term securities |
|
1,867 |
|
492 |
|
1,523 |
|
|
|
3,882 |
| |||||
Other investments |
|
2,450 |
|
990 |
|
1 |
|
|
|
3,441 |
| |||||
Total investments |
|
48,399 |
|
23,070 |
|
1,691 |
|
|
|
73,160 |
| |||||
Cash |
|
137 |
|
154 |
|
3 |
|
|
|
294 |
| |||||
Investment income accrued |
|
499 |
|
231 |
|
4 |
|
|
|
734 |
| |||||
Premiums receivable |
|
4,124 |
|
2,001 |
|
|
|
|
|
6,125 |
| |||||
Reinsurance recoverables |
|
6,292 |
|
3,421 |
|
|
|
|
|
9,713 |
| |||||
Ceded unearned premiums |
|
712 |
|
89 |
|
|
|
|
|
801 |
| |||||
Deferred acquisition costs |
|
1,570 |
|
234 |
|
|
|
|
|
1,804 |
| |||||
Deferred taxes |
|
279 |
|
86 |
|
(62 |
) |
|
|
303 |
| |||||
Contractholder receivables |
|
3,179 |
|
1,149 |
|
|
|
|
|
4,328 |
| |||||
Goodwill |
|
2,619 |
|
1,015 |
|
|
|
|
|
3,634 |
| |||||
Other intangible assets |
|
250 |
|
101 |
|
|
|
|
|
351 |
| |||||
Investment in subsidiaries |
|
|
|
|
|
28,616 |
|
(28,616 |
) |
|
| |||||
Other assets |
|
2,010 |
|
357 |
|
198 |
|
|
|
2,565 |
| |||||
Total assets |
|
$ |
70,070 |
|
$ |
31,908 |
|
$ |
30,450 |
|
$ |
(28,616 |
) |
$ |
103,812 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
| |||||
Claims and claim adjustment expense reserves |
|
$ |
33,506 |
|
$ |
17,389 |
|
$ |
|
|
$ |
|
|
$ |
50,895 |
|
Unearned premium reserves |
|
8,188 |
|
3,662 |
|
|
|
|
|
11,850 |
| |||||
Contractholder payables |
|
3,179 |
|
1,149 |
|
|
|
|
|
4,328 |
| |||||
Payables for reinsurance premiums |
|
127 |
|
171 |
|
|
|
|
|
298 |
| |||||
Debt |
|
692 |
|
|
|
5,654 |
|
|
|
6,346 |
| |||||
Other liabilities |
|
4,109 |
|
1,180 |
|
10 |
|
|
|
5,299 |
| |||||
Total liabilities |
|
49,801 |
|
23,551 |
|
5,664 |
|
|
|
79,016 |
| |||||
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
| |||||
Common stock (1,750.0 shares authorized; 353.5 shares issued and outstanding) |
|
|
|
390 |
|
21,500 |
|
(390 |
) |
21,500 |
| |||||
Additional paid-in capital |
|
11,634 |
|
6,502 |
|
|
|
(18,136 |
) |
|
| |||||
Retained earnings |
|
7,868 |
|
1,042 |
|
24,281 |
|
(8,900 |
) |
24,291 |
| |||||
Accumulated other comprehensive income |
|
767 |
|
423 |
|
810 |
|
(1,190 |
) |
810 |
| |||||
Treasury stock, at cost (401.5 shares) |
|
|
|
|
|
(21,805 |
) |
|
|
(21,805 |
) | |||||
Total shareholders equity |
|
20,269 |
|
8,357 |
|
24,786 |
|
(28,616 |
) |
24,796 |
| |||||
Total liabilities and shareholders equity |
|
$ |
70,070 |
|
$ |
31,908 |
|
$ |
30,450 |
|
$ |
(28,616 |
) |
$ |
103,812 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30, 2014
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,309 |
|
$ |
532 |
|
$ |
1,735 |
|
$ |
(1,841 |
) |
$ |
1,735 |
|
Net adjustments to reconcile net income to net cash provided by operating activities |
|
(154 |
) |
(317 |
) |
305 |
|
(241 |
) |
(407 |
) | |||||
Net cash provided by operating activities |
|
1,155 |
|
215 |
|
2,040 |
|
(2,082 |
) |
1,328 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Proceeds from maturities of fixed maturities |
|
3,005 |
|
1,909 |
|
1 |
|
|
|
4,915 |
| |||||
Proceeds from sales of investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities |
|
415 |
|
369 |
|
1 |
|
|
|
785 |
| |||||
Equity securities |
|
57 |
|
34 |
|
4 |
|
|
|
95 |
| |||||
Real estate investments |
|
|
|
5 |
|
|
|
|
|
5 |
| |||||
Other investments |
|
196 |
|
142 |
|
|
|
|
|
338 |
| |||||
Purchases of investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities |
|
(3,399 |
) |
(2,046 |
) |
(4 |
) |
|
|
(5,449 |
) | |||||
Equity securities |
|
(3 |
) |
(32 |
) |
(5 |
) |
|
|
(40 |
) | |||||
Real estate investments |
|
(21 |
) |
(15 |
) |
|
|
|
|
(36 |
) | |||||
Other investments |
|
(154 |
) |
(72 |
) |
|
|
|
|
(226 |
) | |||||
Net sales (purchases) of short-term securities |
|
347 |
|
(47 |
) |
(240 |
) |
|
|
60 |
| |||||
Securities transactions in course of settlement |
|
113 |
|
91 |
|
|
|
|
|
204 |
| |||||
Acquisitions, net of cash acquired |
|
(9 |
) |
(3 |
) |
|
|
|
|
(12 |
) | |||||
Other |
|
(147 |
) |
(5 |
) |
|
|
|
|
(152 |
) | |||||
Net cash provided by (used in) investing activities |
|
400 |
|
330 |
|
(243 |
) |
|
|
487 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Dividends paid to shareholders |
|
|
|
|
|
(365 |
) |
|
|
(365 |
) | |||||
Issuance of common stock employee share options |
|
|
|
|
|
122 |
|
|
|
122 |
| |||||
Treasury stock acquired share repurchase authorization |
|
|
|
|
|
(1,525 |
) |
|
|
(1,525 |
) | |||||
Treasury stock acquired net employee share-based compensation |
|
|
|
|
|
(55 |
) |
|
|
(55 |
) | |||||
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
24 |
|
|
|
24 |
| |||||
Dividends paid to parent company |
|
(1,525 |
) |
(557 |
) |
|
|
2,082 |
|
|
| |||||
Net cash used in financing activities |
|
(1,525 |
) |
(557 |
) |
(1,799 |
) |
2,082 |
|
(1,799 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Effect of exchange rate changes on cash |
|
|
|
1 |
|
|
|
|
|
1 |
| |||||
Net increase (decrease) in cash |
|
30 |
|
(11 |
) |
(2 |
) |
|
|
17 |
| |||||
Cash at beginning of year |
|
137 |
|
154 |
|
3 |
|
|
|
294 |
| |||||
Cash at end of period |
|
$ |
167 |
|
$ |
143 |
|
$ |
1 |
|
$ |
|
|
$ |
311 |
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
| |||||
Income taxes paid (received) |
|
$ |
570 |
|
$ |
205 |
|
$ |
(48 |
) |
$ |
|
|
$ |
727 |
|
Interest paid |
|
$ |
24 |
|
$ |
|
|
$ |
159 |
|
$ |
|
|
$ |
183 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued
CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30, 2013
(in millions) |
|
TPC |
|
Other |
|
Travelers (1) |
|
Eliminations |
|
Consolidated |
| |||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income |
|
$ |
1,392 |
|
$ |
524 |
|
$ |
1,821 |
|
$ |
(1,916 |
) |
$ |
1,821 |
|
Net adjustments to reconcile net income to net cash provided by operating activities |
|
(807 |
) |
37 |
|
(1,148 |
) |
1,349 |
|
(569 |
) | |||||
Net cash provided by operating activities |
|
585 |
|
561 |
|
673 |
|
(567 |
) |
1,252 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Proceeds from maturities of fixed maturities |
|
2,570 |
|
1,330 |
|
1 |
|
|
|
3,901 |
| |||||
Proceeds from sales of investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities |
|
300 |
|
267 |
|
5 |
|
|
|
572 |
| |||||
Equity securities |
|
18 |
|
32 |
|
|
|
|
|
50 |
| |||||
Other investments |
|
224 |
|
157 |
|
|
|
|
|
381 |
| |||||
Purchases of investments: |
|
|
|
|
|
|
|
|
|
|
| |||||
Fixed maturities |
|
(3,062 |
) |
(1,419 |
) |
(7 |
) |
|
|
(4,488 |
) | |||||
Equity securities |
|
(15 |
) |
(24 |
) |
(1 |
) |
|
|
(40 |
) | |||||
Real estate investments |
|
|
|
(59 |
) |
|
|
|
|
(59 |
) | |||||
Other investments |
|
(150 |
) |
(59 |
) |
|
|
|
|
(209 |
) | |||||
Net sales (purchases) of short-term securities |
|
(182 |
) |
78 |
|
185 |
|
|
|
81 |
| |||||
Securities transactions in course of settlement |
|
59 |
|
1 |
|
|
|
|
|
60 |
| |||||
Other |
|
(155 |
) |
(2 |
) |
|
|
|
|
(157 |
) | |||||
Net cash provided by (used in) investing activities |
|
(393 |
) |
302 |
|
183 |
|
|
|
92 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Payment of debt |
|
(500 |
) |
|
|
|
|
|
|
(500 |
) | |||||
Dividends paid to shareholders |
|
|
|
|
|
(366 |
) |
|
|
(366 |
) | |||||
Issuance of common stock employee share options |
|
|
|
|
|
139 |
|
|
|
139 |
| |||||
Treasury stock acquired share repurchase authorization |
|
|
|
|
|
(600 |
) |
|
|
(600 |
) | |||||
Treasury stock acquired net employee share-based compensation |
|
|
|
|
|
(59 |
) |
|
|
(59 |
) | |||||
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
29 |
|
|
|
29 |
| |||||
Capital contributions |
|
500 |
|
|
|
|
|
(500 |
) |
|
| |||||
Dividends paid to parent company |
|
(217 |
) |
(850 |
) |
|
|
1,067 |
|
|
| |||||
Net cash used in financing activities |
|
(217 |
) |
(850 |
) |
(857 |
) |
567 |
|
(1,357 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Effect of exchange rate changes on cash |
|
|
|
(9 |
) |
|
|
|
|
(9 |
) | |||||
Net increase (decrease) in cash |
|
(25 |
) |
4 |
|
(1 |
) |
|
|
(22 |
) | |||||
Cash at beginning of year |
|
177 |
|
151 |
|
2 |
|
|
|
330 |
| |||||
Cash at end of period |
|
$ |
152 |
|
$ |
155 |
|
$ |
1 |
|
$ |
|
|
$ |
308 |
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
| |||||
Income taxes paid (received) |
|
$ |
479 |
|
$ |
178 |
|
$ |
(162 |
) |
$ |
|
|
$ |
495 |
|
Interest paid |
|
$ |
36 |
|
$ |
|
|
$ |
148 |
|
$ |
|
|
$ |
184 |
|
(1) The Travelers Companies, Inc., excluding its subsidiaries.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Companys financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2014 Second Quarter Consolidated Results of Operations
· Net income of $683 million, or $1.98 per share basic and $1.95 per share diluted
· Net earned premiums of $5.93 billion
· Catastrophe losses of $436 million ($284 million after-tax)
· Net favorable prior year reserve development of $183 million ($122 million after-tax)
· Combined ratio of 95.1%
· Net investment income of $695 million ($553 million after-tax)
· Operating cash flows of $625 million
2014 Second Quarter Consolidated Financial Condition
· Total investments of $73.94 billion; fixed maturities and short-term securities comprised 93% of total investments
· Total assets of $104.81 billion
· Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 19.9% (21.3% excluding net unrealized investment gains, net of tax)
· Repurchased 9.5 million common shares for total cost of $875 million under the publicly-announced share repurchase authorization
· Shareholders equity of $25.53 billion
· Net unrealized investment gains of $3.09 billion ($2.01 billion after-tax)
· Book value per common share of $75.32
· Holding company liquidity of $1.83 billion
Realignment of Reportable Business Segments
On June 10, 2014, the Company announced a realignment of two of its three business segments, effective July 1, 2014. The discussion of segment results herein is based on the Companys former reportable business segment structure as it existed on June 30, 2014.
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions, except ratio and per share amounts) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Premiums |
|
$ |
5,928 |
|
$ |
5,603 |
|
$ |
11,751 |
|
$ |
11,120 |
|
Net investment income |
|
695 |
|
687 |
|
1,431 |
|
1,357 |
| ||||
Fee income |
|
112 |
|
82 |
|
219 |
|
179 |
| ||||
Net realized investment gains |
|
16 |
|
167 |
|
17 |
|
177 |
| ||||
Other revenues |
|
34 |
|
135 |
|
75 |
|
169 |
| ||||
Total revenues |
|
6,785 |
|
6,674 |
|
13,493 |
|
13,002 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Claims and expenses |
|
|
|
|
|
|
|
|
| ||||
Claims and claim adjustment expenses |
|
3,826 |
|
3,530 |
|
7,141 |
|
6,683 |
| ||||
Amortization of deferred acquisition costs |
|
965 |
|
950 |
|
1,915 |
|
1,898 |
| ||||
General and administrative expenses |
|
1,001 |
|
931 |
|
1,882 |
|
1,846 |
| ||||
Interest expense |
|
92 |
|
86 |
|
184 |
|
178 |
| ||||
Total claims and expenses |
|
5,884 |
|
5,497 |
|
11,122 |
|
10,605 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
901 |
|
1,177 |
|
2,371 |
|
2,397 |
| ||||
Income tax expense |
|
218 |
|
252 |
|
636 |
|
576 |
| ||||
Net income |
|
$ |
683 |
|
$ |
925 |
|
$ |
1,735 |
|
$ |
1,821 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per share |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
1.98 |
|
$ |
2.44 |
|
$ |
4.97 |
|
$ |
4.80 |
|
Diluted |
|
$ |
1.95 |
|
$ |
2.41 |
|
$ |
4.91 |
|
$ |
4.75 |
|
|
|
|
|
|
|
|
|
|
| ||||
Combined ratio |
|
|
|
|
|
|
|
|
| ||||
Loss and loss adjustment expense ratio |
|
63.6 |
% |
62.3 |
% |
59.9 |
% |
59.3 |
% | ||||
Underwriting expense ratio |
|
31.5 |
|
32.0 |
|
30.6 |
|
32.1 |
| ||||
Combined ratio |
|
95.1 |
% |
94.3 |
% |
90.5 |
% |
91.4 |
% | ||||
Incremental impact of direct to consumer initiative on combined ratio |
|
0.5 |
% |
0.5 |
% |
0.5 |
% |
0.6 |
% |
The following discussions of the Companys net income and segment operating income are presented on an after-tax basis. Discussions of the components of net income and segment operating income are presented on a pretax basis, unless otherwise noted. Discussions of net income per common share are presented on a diluted basis. For definitions of combined ratio, loss and loss adjustment expense ratio, underwriting expense ratio and other related ratios, see Part II Item 5 Other Information in this report.
Overview
Diluted net income per share of $1.95 in the second quarter of 2014 decreased by 19% from diluted net income per share of $2.41 in the same period of 2013. Net income of $683 million in the second quarter of 2014 decreased by 26% from net income of $925 million in the same period of 2013. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in net income in the second quarter of 2014 compared with the same period of 2013 primarily reflected the pretax impacts of (i) a decrease in net realized investment gains, (ii) a decline in other revenues, (iii) an increase in catastrophe losses and (iv) slightly lower net favorable prior year reserve development, partially offset by (v) higher underwriting margins excluding catastrophe losses and prior year reserve development (underlying underwriting margins) and (vi) higher net investment income. Catastrophe losses in the second quarters of 2014 and 2013 were $436 million and $340 million, respectively. Net favorable prior year reserve development in the second quarters of 2014 and 2013 was $183 million and $192 million, respectively. The improvement in underlying underwriting
margins primarily resulted from the impact of earned pricing that exceeded loss cost trends in each of the Companys business segments, partially offset by higher non-catastrophe weather-related losses. Partially offsetting this net pretax decrease was the related reduction in income tax expense. Additionally, net income in the second quarter of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the second quarter of 2014 was higher than in the same period in 2013. This resulted from the impact of the reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters, partially offset by interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income in the second quarter of 2014.
Diluted net income per share of $4.91 in the first six months of 2014 increased by 3% over diluted net income per share of $4.75 in the same period of 2013. Net income of $1.74 billion in the first six months of 2014 decreased by 5% from net income of $1.82 billion in the same period of 2013. The increase in diluted net income per share as compared with the decrease in net income reflected the impact of share repurchases in recent periods. The decrease in net income primarily reflected the pretax impacts of (i) a decrease in net realized investment gains, (ii) higher catastrophe losses and (iii) a decline in other revenues, partially offset by (iv) higher underlying underwriting margins, (v) higher net investment income and (vi) an increase in net favorable prior year reserve development. Catastrophe losses in the first six months of 2014 and 2013 were $585 million and $439 million, respectively. Net favorable prior year reserve development in the first six months of 2014 and 2013 was $477 million and $423 million, respectively. The improvement in underlying underwriting margins primarily resulted from the impact of earned pricing that exceeded loss cost trends in each of the Companys business segments, partially offset by higher non-catastrophe weather-related losses. Partially offsetting this net pretax decrease was the related reduction in income tax expense. Additionally, net income in the first six months of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the first six months of 2014 was higher than in the same period in 2013. This resulted primarily from the impact of the reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters.
Revenues
Earned Premiums
Earned premiums in the second quarter of 2014 were $5.93 billion, $325 million or 6% higher than in the same period of 2013. Earned premiums in the first six months of 2014 were $11.75 billion, $631 million or 6% higher than in the same period of 2013. The increase in earned premiums in both periods of 2014 primarily reflected the impact of the acquisition of Dominion on November 1, 2013. In the Business Insurance segment, earned premiums in the second quarter and first six months of 2014 both increased by 2% over the respective periods of 2013. In the Financial, Professional & International Insurance segment, earned premiums in the second quarter and first six months of 2014 increased by 45% and 44% over the respective periods of 2013, primarily reflecting the impact of the acquisition of Dominion. In the Personal Insurance segment, earned premiums in the second quarter and first six months of 2014 decreased by 3% and 4% from the respective periods of 2013. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow.
Net Investment Income
The following table sets forth information regarding the Companys investments.
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(dollars in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Average investments (1) |
|
$ |
71,880 |
|
$ |
69,701 |
|
$ |
72,010 |
|
$ |
69,903 |
|
Pretax net investment income |
|
695 |
|
687 |
|
1,431 |
|
1,357 |
| ||||
After-tax net investment income |
|
553 |
|
551 |
|
1,135 |
|
1,093 |
| ||||
Average pretax yield (2) |
|
3.9 |
% |
3.9 |
% |
4.0 |
% |
3.9 |
% | ||||
Average after-tax yield (2) |
|
3.1 |
% |
3.2 |
% |
3.2 |
% |
3.1 |
% | ||||
(1) Excludes net unrealized investment gains and losses, net of tax, and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.
(2) Excludes net realized investment gains and losses and net unrealized investment gains and losses, net of tax.
Net investment income in the second quarter of 2014 was $695 million, $8 million or 1% higher than in the same period of 2013. Net investment income in the first six months of 2014 was $1.43 billion, $74 million or 5% higher than in the same period of 2013. Net investment income from fixed maturity investments in the second quarter and first six months of 2014 was $562 million and $1.14 billion, respectively, $12 million and $18 million lower, respectively, than in the same periods of 2013, primarily resulting from lower long-term reinvestment yields available in the market, partially offset by the impact of the acquisition of Dominion. Net investment income generated by non-fixed maturity investments in the second quarter and first six months of 2014 was $140 million and $303 million, respectively, $20 million and $91 million higher, respectively, than in the same periods of 2013, primarily driven by higher returns from the Companys private equity investments in both periods, as well as higher returns from real estate partnership investments in the first quarter of 2014.
Fee Income
The National Accounts market in the Business Insurance segment is the primary source of the Companys fee-based business. The $30 million and $40 million increases in fee income in the second quarter and first six months of 2014, respectively, compared with the same periods of 2013 are discussed in the Business Insurance segment discussion that follows.
Net Realized Investment Gains
The following table sets forth information regarding the Companys net realized investment gains.
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Realized Investment Gains |
|
|
|
|
|
|
|
|
| ||||
Other-than-temporary impairment losses |
|
$ |
(1 |
) |
$ |
(2 |
) |
$ |
(10 |
) |
$ |
(7 |
) |
Other net realized investment gains |
|
17 |
|
169 |
|
27 |
|
184 |
| ||||
Net realized investment gains |
|
$ |
16 |
|
$ |
167 |
|
$ |
17 |
|
$ |
177 |
|
Other net realized investment gains in the second quarter and first six months of 2013 included $134 million and $115 million, respectively, of net realized gains associated with U.S. Treasury futures contracts, which require daily mark-to-market settlement and are used from time to time to shorten the duration of the Companys fixed maturity investment portfolio.
Other Revenues
Other revenues in the second quarter and first six months of 2013 included a $91 million gain from the settlement of a legal proceeding. The remainder of other revenues in all periods presented primarily consisted of premium installment charges.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2014 were $3.83 billion, $296 million or 8% higher than in the same period of 2013, primarily reflecting (i) the impact of the acquisition of Dominion, (ii) an increase in catastrophe losses, (iii) higher non-catastrophe weather-related losses, (iv) the impact of loss cost trends and (v) slightly lower net favorable prior year reserve development. Catastrophe losses in the second quarters of both 2014 and 2013 primarily resulted from wind and hail storms in several regions of the United States. In addition, catastrophe losses in the second quarter of 2013 included losses from floods in Alberta, Canada.
Claims and claim adjustment expenses in the first six months of 2014 were $7.14 billion, $458 million or 7% higher than in the same period of 2013, primarily reflecting the same factors described above, except that net favorable prior year reserve development in the first six months of 2014 was higher than in the same period of 2013. Catastrophe losses in the first six months of 2014 included the second quarter storms in the United States, as well as a winter storm in the Mid-Atlantic, Midwestern and Southeastern regions of the United States in the first quarter of 2014. Catastrophe losses in the first six
months of 2013 included the second quarter storms in the United States and floods in Canada described above, as well as tornadoes and hail storms in the Southeastern United States in the first quarter of 2013. Factors contributing to net favorable prior year reserve development in each segment during these periods are discussed in more detail in the segment discussions that follow.
Significant Catastrophe Losses
The following table presents for significant catastrophes the amount of losses recorded in the three months and six months ended June 30, 2014 and 2013, and the amount of related net unfavorable (favorable) prior period reserve development recognized in subsequent periods, as well as the estimate of ultimate losses at June 30, 2014 and December 31, 2013 for the significant catastrophes presented. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes. For a further description of the Companys significant catastrophes, refer to Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Overview in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
|
|
For The Three Months Ended |
|
For The Six Months Ended |
|
Estimated Ultimate Losses |
| ||||||||||||
(in millions, pretax and net of reinsurance) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
June 30, 2014 |
|
December 31, |
| ||||||
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Property Claim Services (PCS) Serial Number: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
67 Severe wind and hail storms |
|
$ |
|
|
$ |
1 |
|
$ |
(2 |
) |
$ |
3 |
|
$ |
136 |
|
$ |
138 |
|
74 Severe wind and hail storms |
|
(1 |
) |
(12 |
) |
3 |
|
(9 |
) |
154 |
|
151 |
| ||||||
76 Severe wind and hail storms |
|
(3 |
) |
(7 |
) |
(3 |
) |
(15 |
) |
135 |
|
138 |
| ||||||
83 Severe wind storms |
|
(1 |
) |
6 |
|
(8 |
) |
6 |
|
130 |
|
138 |
| ||||||
90 Storm Sandy |
|
(2 |
) |
(4 |
) |
(6 |
) |
(18 |
) |
966 |
|
972 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
PCS Serial Number: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
93 Severe wind and hail storms |
|
1 |
|
16 |
|
|
|
115 |
|
114 |
|
114 |
| ||||||
15 Severe wind and hail storms |
|
1 |
|
96 |
|
1 |
|
96 |
|
129 |
|
128 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
PCS Serial Number: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
32 Winter storm |
|
3 |
|
n/a |
|
152 |
|
n/a |
|
152 |
|
n/a |
| ||||||
40 Severe wind and hail storms |
|
105 |
|
n/a |
|
105 |
|
n/a |
|
105 |
|
n/a |
| ||||||
43 Severe wind and hail storms |
|
116 |
|
n/a |
|
116 |
|
n/a |
|
116 |
|
n/a |
| ||||||
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2014 was $965 million, $15 million or 2% higher than in the same period of 2013. Amortization of deferred acquisition costs in the first six months of 2014 was $1.92 billion, $17 million or 1% higher than in the same 2013 period. The increase in both periods of 2014 primarily resulted from the impact of the acquisition of Dominion, partially offset by declines in the Personal Insurance segment. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.
General and Administrative Expenses
General and administrative expenses in the second quarter of 2014 were $1.00 billion, $70 million or 8% higher than in the same period of 2013. General and administrative expenses in the first six months of 2014 were $1.88 billion, $36 million or 2% higher than in the same period of 2013. The increase in the second quarter of 2014 primarily reflected the impact of the acquisition of Dominion. The increase in the first six months of 2014 primarily reflected the impact of the acquisition of Dominion, partially offset by a $76 million reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums that resulted from a change in state law that took effect in the first quarter of 2014. General and administrative expenses are discussed in more detail in the segment discussions that follow.
Interest Expense
Interest expense in the second quarter and first six months of 2014 was $92 million and $184 million, respectively, compared with $86 million and $178 million in the same respective periods of 2013. The increases in both periods of 2014 reflected higher average levels of debt outstanding.
Income Tax Expense
Income tax expense in the second quarter of 2014 was $218 million, $34 million or 13% lower than in the same period of 2013, primarily reflecting the tax effects of the $276 million decrease in income before income taxes, partially offset by the impact of a $63 million reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters. Income tax expense in the first six months of 2014 was $636 million, $60 million or 10% higher than in the same period of 2013, primarily reflecting the impact of the resolution of prior year tax matters in the second quarter of 2013.
The Companys effective tax rates in the second quarter and first six months of 2014 were 24% and 27%, respectively. In the second quarter and first six months of 2013, the Companys effective tax rates were 21% and 24%, respectively. The effective tax rates in all periods were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Companys income tax provision. In addition, the effective tax rates in the second quarter and first six months of 2013 were reduced by the resolution of prior year tax matters.
Combined Ratio
The combined ratio of 95.1% in the second quarter of 2014 was 0.8 points higher than the combined ratio of 94.3% in the same period of 2013. The combined ratio of 90.5% in the first six months of 2014 was 0.9 points lower than the combined ratio of 91.4% in the same period of 2013. The increase in the second quarter of 2014 primarily reflected the impact of higher catastrophe losses. The decrease in the first six months of 2014 primarily reflected the impacts of a lower underwriting expense ratio, partially offset by a higher loss and loss adjustment expense ratio primarily driven by higher catastrophe losses.
The loss and loss adjustment expense ratio of 63.6% in the second quarter of 2014 was 1.3 points higher than the loss and loss adjustment expense ratio of 62.3% in the same period of 2013. Catastrophe losses accounted for 7.3 points and 6.1 points of the 2014 and 2013 second quarter loss and loss adjustment expense ratios, respectively. Net favorable prior year reserve development in the second quarters of 2014 and 2013 provided 3.1 points and 3.5 points of benefit, respectively, to the loss and loss adjustment expense ratio. The loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development (underlying loss and loss adjustment expense ratio) in the second quarter of 2014 was 0.3 points lower than the 2013 second quarter ratio on the same basis, reflecting the improvement in underlying underwriting margins discussed in the Overview section above.
The loss and loss adjustment expense ratio of 59.9% in the first six months of 2014 was 0.6 points higher than the loss and loss adjustment expense ratio of 59.3% in the same period of 2013. Catastrophe losses accounted for 5.0 points and 3.9 points of the 2014 and 2013 six-month loss and loss adjustment expense ratios, respectively. Net favorable prior year reserve development in the first six months of 2014 and 2013 provided 4.1 points and 3.8 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 six-month underlying loss and loss adjustment expense ratio was 0.2 points lower than the 2013 six-month ratio on the same basis, reflecting the same factors discussed above for the second quarter of 2014.
The underwriting expense ratio of 31.5% for the second quarter of 2014 was 0.5 points lower than the underwriting expense ratio of 32.0% in the same period of 2013, primarily reflecting lower commission expenses in the Personal Insurance segment. In the first six months of 2014, the underwriting expense ratio of 30.6% was 1.5 points lower than the underwriting expense ratio of 32.1% in the same 2013 period. The underwriting expense ratio in the first six months of 2014 benefited from the reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums described above.
Written Premiums
Consolidated gross and net written premiums were as follows:
|
|
Gross Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Business Insurance |
|
$ |
3,379 |
|
$ |
3,344 |
|
$ |
7,047 |
|
$ |
6,970 |
|
Financial, Professional & International Insurance |
|
1,224 |
|
906 |
|
2,308 |
|
1,705 |
| ||||
Personal Insurance |
|
1,916 |
|
1,997 |
|
3,565 |
|
3,760 |
| ||||
Total |
|
$ |
6,519 |
|
$ |
6,247 |
|
$ |
12,920 |
|
$ |
12,435 |
|
|
|
Net Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Business Insurance |
|
$ |
3,101 |
|
$ |
3,068 |
|
$ |
6,405 |
|
$ |
6,328 |
|
Financial, Professional & International Insurance |
|
1,168 |
|
849 |
|
2,118 |
|
1,496 |
| ||||
Personal Insurance |
|
1,893 |
|
1,907 |
|
3,512 |
|
3,597 |
| ||||
Total |
|
$ |
6,162 |
|
$ |
5,824 |
|
$ |
12,035 |
|
$ |
11,421 |
|
Gross and net written premiums in the second quarter of 2014 increased by 4% and 6%, respectively, over the same period of 2013. Gross and net written premiums in the first six months of 2014 increased by 4% and 5%, respectively, over the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion. Factors contributing to the changes in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.
RESULTS OF OPERATIONS BY SEGMENT
On June 10, 2014, the Company announced a realignment of its management team that gave rise to a realignment of two of its three business segments, effective July 1, 2014. The Companys International Insurance group, which had previously been included in the Financial, Professional & International Insurance segment, will be combined with the Companys previous Business Insurance segment to create a new Business & International Insurance segment. The Bond & Financial Products group, which was the remaining business in the Financial, Professional & International Insurance segment, will now comprise the new Bond & Financial Products segment. The Personal Insurance segment will not be impacted by these changes. The changes were designed to reflect the realignment of the Companys management team and the manner in which the Companys businesses are managed effective July 1, 2014, 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. The newly aligned segments will be presented in the Companys financial statements beginning with the period ending September 30, 2014 and the prior periods presented will be restated to conform to the new presentation. The following discussion of segment results is based on the Companys reportable business segment structure as it existed on June 30, 2014.
Business Insurance
Results of the Companys Business Insurance segment were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(dollars in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Earned premiums |
|
$ |
3,067 |
|
$ |
3,018 |
|
$ |
6,083 |
|
$ |
5,960 |
|
Net investment income |
|
496 |
|
502 |
|
1,026 |
|
989 |
| ||||
Fee income |
|
111 |
|
82 |
|
218 |
|
179 |
| ||||
Other revenues |
|
8 |
|
114 |
|
16 |
|
127 |
| ||||
Total revenues |
|
$ |
3,682 |
|
$ |
3,716 |
|
$ |
7,343 |
|
$ |
7,255 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total claims and expenses |
|
$ |
3,156 |
|
$ |
3,000 |
|
$ |
5,918 |
|
$ |
5,741 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
$ |
409 |
|
$ |
579 |
|
$ |
1,062 |
|
$ |
1,169 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss and loss adjustment expense ratio |
|
68.2 |
% |
65.3 |
% |
64.0 |
% |
61.6 |
% | ||||
Underwriting expense ratio |
|
30.8 |
|
30.9 |
|
29.4 |
|
31.3 |
| ||||
Combined ratio |
|
99.0 |
% |
96.2 |
% |
93.4 |
% |
92.9 |
% |
Overview
Operating income in the second quarter of 2014 was $409 million, $170 million or 29% lower than operating income of $579 million in the same period of 2013. The decrease in operating income in the second quarter of 2014 compared with the same period of 2013 primarily reflected the pretax impacts of (i) a decline in other revenues, (ii) an increase in catastrophe losses, (iii) a decline in net favorable prior year reserve development and (iv) a slight decline in net investment income, partially offset by (v) higher underlying underwriting margins. Catastrophe losses in the second quarters of 2014 and 2013 were $236 million and $148 million, respectively. Net favorable prior year reserve development in the second quarters of 2014 and 2013 was $25 million and $55 million, respectively. The improvement in underlying underwriting margins primarily resulted from earned pricing that exceeded loss cost trends, partially offset by higher non-catastrophe weather-related losses. Partially offsetting this net pretax decrease in operating income was the related reduction in income tax expense. In addition, operating income in the second quarter of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the second quarter of 2014 was higher than in the same period in 2013. This resulted from the impact of the reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters, partially offset by interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income in the second quarter of 2014.
Operating income in the first six months of 2014 was $1.06 billion, $107 million or 9% lower than operating income of $1.17 billion in the same period of 2013, primarily reflecting the same factors described above, except that net investment income in the first six months of 2014 was higher than in the same period of 2013. Catastrophe losses in the first six months of 2014 and 2013 were $316 million and $183 million, respectively. Net favorable prior year reserve development in the first six months of 2014 and 2013 was $118 million and $168 million, respectively. Underlying underwriting margins in the first six months of 2014 also benefited from a $76 million reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums in the first quarter of 2014.
Earned Premiums
Earned premiums in the second quarter of 2014 were $3.07 billion, $49 million or 2% higher than in the same period of 2013. Earned premiums in the first six months of 2014 were $6.08 billion, $123 million or 2% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of an increase in net written premiums over the preceding twelve months.
Net Investment Income
Net investment income in the second quarter of 2014 was $496 million, $6 million or 1% lower than in the same 2013 period. Net investment income in the first six months of 2014 was $1.03 billion, $37 million or 4% higher than in the same period of 2013. Refer to the Net Investment Income section of the Consolidated Results of Operations discussion herein for a description of the factors contributing to the changes in the Companys consolidated net investment income in the second quarter and first six months of 2014 compared with the same periods of 2013. In addition, refer to note 2 of notes to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the Companys net investment income allocation methodology.
Fee Income
National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, as well as claims and policy management services to workers compensation residual market pools. Fee income in the second quarter and first six months of 2014 increased by $29 million and $39 million over the respective periods of 2013, driven by the impact of higher serviced premium volume in workers compensation residual market pools and higher claim volume in the large deductible business.
Other Revenues
Other revenues in the second quarter and first six months of 2013 included a $91 million gain from the settlement of a legal proceeding.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2014 were $2.14 billion, $134 million or 7% higher than in the same period of 2013. The increase in 2014 primarily reflected (i) an increase in catastrophe losses, (ii) a decline in net favorable prior year reserve development, (iii) higher non-catastrophe weather-related losses and (iv) the impact of loss cost trends, partially offset by (v) the impact of a modest decline in volumes of insured exposures. Net favorable prior year reserve development in the second quarter of 2014 was primarily driven by better than expected loss experience in the general liability product line related to excess coverages for accident years 2008 through 2012, reflecting more favorable legal and judicial environments than what the Company previously expected. Net favorable prior year reserve development in the second quarter of 2013 was primarily driven by better than expected loss experience in the general liability product line related to excess coverages for accident years 2004 through 2009, reflecting more favorable legal and judicial environments than what the Company previously expected. These factors contributing to net favorable prior year reserve development in the second quarters of 2014 and 2013 were partially offset by $87 million and $65 million increases, respectively, to environmental reserves, which are discussed in further detail in the Environmental Claims and Litigation section herein.
Claims and claim adjustment expenses in the first six months of 2014 were $3.99 billion, $238 million or 6% higher than in the same period of 2013. Claims and claim adjustment expenses in the first six months of 2014 were impacted by the same factors described above for the second quarter of 2014. Net favorable prior year reserve development in the first six months of 2014 was primarily driven by the same factors described above for the second quarter and by better than expected loss experience for the property product line for accident years 2010 through 2013 related to non-catastrophe and catastrophe losses, partially offset by higher than expected loss experience for liability coverages in the commercial multi-peril product line for accident years 2010 through 2013. Net favorable prior year reserve development in the first six months of 2013 was primarily driven by better than expected loss experience in the general liability product line related to excess coverages for accident years 2004 through 2010, reflecting more favorable legal and judicial environments than what the Company previously expected, and by better than expected loss experience for the property product line for accident years 2010 through 2012.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2014 was $479 million, $2 million or less than 1% lower than in the same period of 2013. Amortization of deferred acquisition costs in the first six months of 2014 was $950 million, $6 million or 1% lower than in the same 2013 period. The decreases in both periods of 2014 primarily reflected a modest change in business mix.
General and Administrative Expenses
General and administrative expenses in the second quarter of 2014 were $535 million, $24 million or 5% higher than in the same period of 2013. General and administrative expenses in the first six months of 2014 were $973 million, $55 million or 5% lower than in the same period of 2013, primarily reflecting a $76 million reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums in the first quarter of 2014.
Income Tax Expense
Income tax expense in the second quarter of 2014 was $117 million, $20 million or 15% lower than in the same period of 2013, primarily reflecting the tax effects of the $190 million decline in pre-tax operating income, partially offset by the impact of a $43 million reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters. Income tax expense in the first six months of 2014 was $363 million, $18 million or 5% higher than in the same period of 2013, primarily reflecting the impact of the resolution of prior year tax matters in the second quarter of 2013, partially offset by the tax effects of the $89 million decline in pre-tax operating income.
Combined Ratio
The combined ratio of 99.0% in the second quarter of 2014 was 2.8 points higher than the combined ratio of 96.2% in the same period of 2013. The combined ratio of 93.4% in the first six months of 2014 was 0.5 points higher than the combined ratio of 92.9% in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of higher catastrophe losses.
The loss and loss adjustment expense ratio of 68.2% in the second quarter of 2014 was 2.9 points higher than the loss and loss adjustment expense ratio of 65.3% in the same period of 2013. Catastrophe losses in the second quarters of 2014 and 2013 accounted for 7.7 points and 4.9 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in the second quarters of 2014 and 2013 provided 0.8 points and 1.8 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 second quarter underlying loss and loss adjustment expense ratio was 0.9 points lower than the 2013 ratio on the same basis, reflecting the improvement in underlying underwriting margins discussed in the Overview section above.
The loss and loss adjustment expense ratio of 64.0% in the first six months of 2014 was 2.4 points higher than the loss and loss adjustment expense ratio of 61.6% in the same period of 2013. Catastrophe losses in the first six months of 2014 and 2013 accounted for 5.2 points and 3.1 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in the first six months of 2014 and 2013 provided 1.9 points and 2.8 points of benefit, respectively, to the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in the first six months of 2014 was 0.6 points lower than the 2013 ratio on the same basis, reflecting the same factors discussed above for the second quarter of 2014.
The underwriting expense ratio of 30.8% for the second quarter of 2014 was virtually level with the underwriting expense ratio of 30.9% in the same period of 2013. In the first six months of 2014, the underwriting expense ratio of 29.4% was 1.9 points lower than the underwriting expense ratio of 31.3% in the same 2013 period, primarily reflecting a reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums described above.
Written Premiums
The Business Insurance segments gross and net written premiums by market were as follows:
|
|
Gross Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Select Accounts |
|
$ |
717 |
|
$ |
722 |
|
$ |
1,448 |
|
$ |
1,460 |
|
Commercial Accounts |
|
772 |
|
757 |
|
1,712 |
|
1,712 |
| ||||
National Accounts |
|
368 |
|
361 |
|
853 |
|
807 |
| ||||
Industry-Focused Underwriting |
|
688 |
|
664 |
|
1,445 |
|
1,396 |
| ||||
Target Risk Underwriting |
|
610 |
|
608 |
|
1,157 |
|
1,158 |
| ||||
Specialized Distribution |
|
224 |
|
232 |
|
432 |
|
437 |
| ||||
Total Business Insurance |
|
$ |
3,379 |
|
$ |
3,344 |
|
$ |
7,047 |
|
$ |
6,970 |
|
|
|
Net Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Select Accounts |
|
$ |
705 |
|
$ |
709 |
|
$ |
1,423 |
|
$ |
1,433 |
|
Commercial Accounts |
|
738 |
|
732 |
|
1,631 |
|
1,640 |
| ||||
National Accounts |
|
243 |
|
242 |
|
543 |
|
519 |
| ||||
Industry-Focused Underwriting |
|
678 |
|
653 |
|
1,410 |
|
1,352 |
| ||||
Target Risk Underwriting |
|
513 |
|
500 |
|
967 |
|
948 |
| ||||
Specialized Distribution |
|
224 |
|
232 |
|
431 |
|
436 |
| ||||
Total Business Insurance |
|
$ |
3,101 |
|
$ |
3,068 |
|
$ |
6,405 |
|
$ |
6,328 |
|
Gross and net written premiums in the second quarter of 2014 both increased by 1% over the same period of 2013. Gross and net written premiums in the first six months of 2014 also both increased by 1% over the same period of 2013. In the second quarter and first six months of 2014, business retention rates remained strong and were slightly higher than in the same periods of 2013. Renewal premium changes remained positive in the second quarter and first six months of 2014 but were lower than in the same periods of 2013, primarily due to a decline in renewal rate changes. Renewal rate changes approximated expected loss cost trends. New business premiums in the second quarter of 2014 increased over the same period of 2013, while new business premiums in the first six months of 2014 decreased from the same period of 2013.
Select Accounts. Net written premiums of $705 million in the second quarter of 2014 decreased by less than 1% from the same period of 2013. Net written premiums of $1.42 billion in the first six months of 2014 also decreased by less than 1% from the same period of 2013. Business retention rates in the second quarter and first six months of 2014 remained strong and were higher than in the same periods of 2013. Renewal premium changes in the second quarter and first six months of 2014 remained positive but were lower than in the same periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter and first six months of 2014 decreased slightly from the same periods of 2013.
Commercial Accounts. Net written premiums of $738 million in the second quarter of 2014 increased by 1% over the same period of 2013. Net written premiums of $1.63 billion in the first six months of 2014 decreased by less than 1% from the same period of 2013. Business retention rates in the second quarter and first six months of 2014 remained strong and increased over the same periods of 2013. Renewal premium changes in the second quarter and first six months of 2014 remained positive but were lower than in the same periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter of 2014 increased over the same period of 2013, while new business premiums in the first six months of 2014 decreased from the same period of 2013.
National Accounts. Net written premiums of $243 million in the second quarter of 2014 were slightly higher than in the same period of 2013. Net written premiums of $543 million in the first six months of 2014 increased by 5% over the same period of 2013. Business retention rates in the second quarter and first six months of 2014 remained strong but were lower than in the same periods of 2013. Renewal premium changes in the second quarter of 2014 remained positive and were virtually level with the same period of 2013. Renewal premium changes in the first six months of 2014 remained positive and were higher than in the same period of 2013. New business premiums in the second quarter and first six months of 2014 decreased from the same periods of 2013. Growth in workers compensation residual market pools also contributed to premium growth in the first six months of 2014.
Industry-Focused Underwriting. Net written premiums of $678 million in the second quarter of 2014 increased by 4% over the same period of 2013. Net written premiums of $1.41 billion in the first six months of 2014 increased by 4% over the same period of 2013. Premium increases in both periods of 2014 were concentrated in the Construction business unit. Business retention rates in the second quarter and first six months of 2014 remained strong and increased over the same periods of 2013. Renewal premium changes in the second quarter and first six months of 2014 remained positive but were lower than in the same periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter and first six months of 2014 increased over the same periods of 2013.
Target Risk Underwriting. Net written premiums of $513 million in the second quarter of 2014 increased by 3% over the same period of 2013. Net written premiums of $967 million in the first six months of 2014 increased by 2% over the same period of 2013. Premium growth in the second quarter and first six months of 2014 was concentrated in the National Property and Inland Marine business units. Business retention rates in the second quarter and first six months of 2014 remained strong but were slightly lower than in the same periods of 2013. Renewal premium changes in the second quarter and first six months of 2014 remained positive but were lower than in the same periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter and first six months of 2014 decreased from the same periods of 2013.
Specialized Distribution. Net written premiums of $224 million in the second quarter of 2014 decreased by 3% from the same period of 2013. Net written premiums of $431 million in the first six months of 2014 decreased by 1% from the same period of 2013. Business retention rates in the second quarter and first six months of 2014 remained strong but were lower than in the same periods of 2013. Renewal premium changes in the second quarter of 2014 remained positive and were slightly higher than in the same period of 2013, driven by an increase in insured exposures, partially offset by lower renewal rate changes. Renewal premium changes in the first six months of 2014 remained positive but decreased from the same period of 2013, driven by lower renewal rate changes. New business premiums in the second quarter of 2014 decreased from the same period of 2013, while new business premiums in the first six months of 2014 increased over the same period of 2013.
Financial, Professional & International Insurance
Results of the Companys Financial, Professional & International Insurance segment were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(dollars in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Earned premiums |
|
$ |
1,088 |
|
$ |
751 |
|
$ |
2,133 |
|
$ |
1,486 |
|
Net investment income |
|
105 |
|
91 |
|
211 |
|
183 |
| ||||
Fee income |
|
1 |
|
|
|
1 |
|
|
| ||||
Other revenues |
|
8 |
|
5 |
|
16 |
|
10 |
| ||||
Total revenues |
|
$ |
1,202 |
|
$ |
847 |
|
$ |
2,361 |
|
$ |
1,679 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total claims and expenses |
|
$ |
839 |
|
$ |
651 |
|
$ |
1,722 |
|
$ |
1,258 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
$ |
254 |
|
$ |
154 |
|
$ |
449 |
|
$ |
317 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss and loss adjustment expense ratio |
|
38.7 |
% |
43.9 |
% |
42.2 |
% |
42.4 |
% | ||||
Underwriting expense ratio |
|
37.9 |
|
42.4 |
|
38.0 |
|
41.9 |
| ||||
Combined ratio |
|
76.6 |
% |
86.3 |
% |
80.2 |
% |
84.3 |
% |
Overview
Operating income in the second quarter of 2014 was $254 million, $100 million or 65% higher than operating income of $154 million in the second quarter of 2013, primarily reflecting the pretax impacts of (i) an increase in net favorable prior year reserve development, (ii) higher underlying underwriting margins, (iii) lower catastrophe losses and (iv) an increase in net investment income. Catastrophe losses in the second quarters of 2014 and 2013 were $10 million and $46 million, respectively. Catastrophe losses in the second quarter of 2013 primarily resulted from floods in Alberta, Canada. Net favorable prior year reserve development in the second quarters of 2014 and 2013 was $146 million and $72 million, respectively. The increase in underlying underwriting margins primarily reflected the pretax impacts of lower reinsurance costs and earned pricing that exceeded loss cost trends. Partially offsetting this net pretax increase in operating income was the related increase in income tax expense. In addition, operating income in the second quarter of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the second quarter of 2014 was higher than in the same period in 2013. This primarily resulted from the impact of the reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters.
Operating income in the first six months of 2014 was $449 million, $132 million or 42% higher than operating income of $317 million in the same period of 2013, primarily reflecting the same factors described above. Catastrophe losses in the first six months of 2014 and 2013 were $14 million and $46 million, respectively. Net favorable prior year reserve development in the first six months of 2014 and 2013 was $215 million and $130 million, respectively.
Earned Premiums
Earned premiums in the second quarter of 2014 were $1.09 billion, $337 million or 45% higher than in the same period of 2013. Earned premiums in the first six months of 2014 were $2.13 billion, $647 million or 44% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion.
Net Investment Income
Net investment income in the second quarter of 2014 was $105 million, $14 million or 15% higher than in the same period of 2013. Net investment income in the first six months of 2014 was $211 million, $28 million or 15% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion. Included in the Financial, Professional & International Insurance segment are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the Net Investment Income section of Consolidated Results of Operations herein for a discussion of the increase in the Companys consolidated net investment income in the second quarter and first six months of 2014 as compared with the same periods of 2013. In addition, refer to note 2 of notes to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the Companys net investment income allocation methodology.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2014 were $423 million, $91 million or 27% higher than in the same period of 2013, primarily reflecting the impact of (i) the acquisition of Dominion, partially offset by (ii) an increase in net favorable prior year reserve development and (iii) a decline in catastrophe losses. Catastrophe losses in the second quarter of 2013 primarily resulted from floods in Alberta, Canada. In the second quarter of 2014, net favorable prior year reserve development primarily reflected better than expected results in the contract surety product line in Bond & Financial Products for accident years 2004 through 2010, as well as better than expected loss experience in the Companys operations at Lloyds and in Canada. Net favorable prior year reserve development in the second quarter of 2013 was concentrated in Bond & Financial Products and primarily reflected better than expected results for the contract surety product line for accident years 2003 and prior, 2006 through 2008, and 2010.
Claims and claim adjustment expenses in the first six months of 2014 were $906 million, $272 million or 43% higher than in the same period of 2013, primarily reflecting the same factors described above. Net favorable prior year reserve development in the first six months of 2014 was driven by the factors described above for the second quarter of 2014. Net favorable prior year reserve development in the first six months of 2013 was driven by the same factors described above for the second quarter in Bond & Financial Products, as well as better than expected loss experience in the first quarter of 2013 in Canada and in the Companys operations at Lloyds.
Amortization of Deferred Acquisition Expenses
Amortization of deferred acquisition costs in the second quarter of 2014 was $196 million, $49 million or 33% higher than in the same period of 2013. Amortization of deferred acquisition costs in the first six months of 2014 was $383 million, $93 million or 32% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion.
General and Administrative Expenses
General and administrative expenses in the second quarter of 2014 were $220 million, $48 million or 28% higher than in the same period of 2013. General and administrative expenses in the first six months of 2014 were $433 million, $99 million or 30% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion.
Income Tax Expense
Income tax expense in the second quarter of 2014 was $109 million, $67 million higher than in the same period of 2013, primarily reflecting the tax effect of the $167 million increase in pre-tax operating income. In addition, income tax expense in the second quarter of 2013 was reduced by $15 million resulting from the resolution of prior year tax matters. Income tax expense in the first six months of 2014 was $190 million, $86 million or 83% higher than in the same period of 2013, primarily reflecting the tax effect of the $218 million increase in pre-tax operating income and the impact of the reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters.
Combined Ratio
The combined ratio of 76.6% in the second quarter of 2014 was 9.7 points lower than the combined ratio of 86.3% in the same period of 2013. The combined ratio of 80.2% in the first six months of 2014 was 4.1 points lower than the combined ratio of 84.3% in the same period of 2013.
The loss and loss adjustment expense ratio of 38.7% in the second quarter of 2014 was 5.2 points lower than the loss and loss adjustment expense ratio of 43.9% in the same period of 2013. Catastrophe losses in the second quarters of 2014 and 2013 accounted for 0.9 points and 6.1 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in the second quarters of 2014 and 2013 provided 13.5 points and 9.7 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 second quarter underlying loss and loss adjustment expense ratio was 3.8 points higher than the 2013 ratio on the same basis, reflecting the impact of the acquisition of Dominion, partially offset by the improvement in underlying underwriting margins discussed in the Overview section above. Historically, Dominion has had a higher loss and loss adjustment expense ratio than the pre-existing business in the Financial, Professional & International Insurance segment.
The loss and loss adjustment expense ratio of 42.2% in the first six months of 2014 was 0.2 points lower than the loss and loss adjustment expense ratio of 42.4% in the same period of 2013. Catastrophe losses in the first six months of 2014 and 2013 accounted for 0.7 points and 3.1 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in the second quarters of 2014 and 2013 provided 10.1 points and 8.8 points of benefit, respectively, to the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in the first six months of 2014 was 3.5 points higher than the 2013 ratio on the same basis, reflecting the same factors discussed above for the second quarter of 2014.
The underwriting expense ratio of 37.9% in the second quarter of 2014 was 4.5 points lower than the underwriting expense ratio of 42.4% in the same period of 2013. In the first six months of 2014, the underwriting expense ratio of 38.0% was 3.9 points lower than the underwriting expense ratio of 41.9% in the same period of 2013. The decreases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion. Historically, Dominion has had a lower underwriting expense ratio than the pre-existing business in the Financial, Professional & International Insurance segment, as the underwriting expense ratio of pre-existing business reflects investment in the Companys International business to enhance operations, improve underwriting results and support future business growth.
Written Premiums
The Financial, Professional & International Insurance segments gross and net written premiums by market were as follows:
|
|
Gross Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Bond & Financial Products |
|
$ |
542 |
|
$ |
542 |
|
$ |
1,070 |
|
$ |
1,040 |
|
International |
|
682 |
|
364 |
|
1,238 |
|
665 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Financial, Professional & International Insurance |
|
$ |
1,224 |
|
$ |
906 |
|
$ |
2,308 |
|
$ |
1,705 |
|
|
|
Net Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Bond & Financial Products |
|
$ |
540 |
|
$ |
531 |
|
$ |
1,022 |
|
$ |
926 |
|
International |
|
628 |
|
318 |
|
1,096 |
|
570 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Total Financial, Professional & International Insurance |
|
$ |
1,168 |
|
$ |
849 |
|
$ |
2,118 |
|
$ |
1,496 |
|
Gross and net written premiums in the second quarter of 2014 increased by 35% and 38%, respectively, over the same period of 2013. Gross and net written premiums in the first six months of 2014 increased by 35% and 42%, respectively, over the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion.
Net written premiums in Bond & Financial Products in the second quarter of 2014 were $540 million, $9 million or 2% higher than in the same period of 2013, primarily driven by rate increases in the management liability business and lower reinsurance costs in construction surety. Net written premiums in Bond & Financial Products in the first six months of 2014 were $1.02 billion, $96 million or 10% higher than in the same period of 2013, primarily driven by lower reinsurance costs that resulted from the Companys decision to eliminate a management liability excess-of-loss reinsurance treaty, as well as rate increases in the management liability business and higher construction surety premium volume. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in the second quarter and first six months of 2014 remained strong and were higher than in the same periods of 2013. Renewal premium changes in the second quarter and first six months of 2014 remained positive, driven by renewal rate changes that continued to exceed expected loss cost trends, but were lower than in same periods of 2013. New business premiums in the second quarter of 2014 were virtually level with the same period of 2013, while new business premiums in the first six months of 2014 decreased from the same period of 2013.
Net written premiums in International in the second quarter of 2014 were $628 million, $310 million or 97% higher than in the same period of 2013. Net written premiums in International in the first six months of 2014 were $1.10 billion, $526 million or 92% higher than in the same period of 2013. The increases in both periods of 2014 primarily reflected the impact of the acquisition of Dominion. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in the second quarter and first six months of 2014 declined from the same periods of 2013. Renewal premium changes in the second quarter of 2014 were positive and increased over the same period of 2013, primarily due to
higher renewal rate changes. Renewal premium changes in the first six months were positive and increased over the same period of 2013, driven by increases in renewal rate changes and an increase in insured exposures. New business premiums in the second quarter and first six months of 2014 increased over the same periods of 2013, reflecting the impact of the acquisition of Dominion.
Personal Insurance
Results of the Companys Personal Insurance segment were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(dollars in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
Earned premiums |
|
$ |
1,773 |
|
$ |
1,834 |
|
$ |
3,535 |
|
$ |
3,674 |
|
Net investment income |
|
94 |
|
94 |
|
194 |
|
185 |
| ||||
Other revenues |
|
17 |
|
15 |
|
43 |
|
33 |
| ||||
Total revenues |
|
$ |
1,884 |
|
$ |
1,943 |
|
$ |
3,772 |
|
$ |
3,892 |
|
|
|
|
|
|
|
|
|
|
| ||||
Total claims and expenses |
|
$ |
1,788 |
|
$ |
1,753 |
|
$ |
3,282 |
|
$ |
3,417 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
|
$ |
75 |
|
$ |
142 |
|
$ |
343 |
|
$ |
339 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss and loss adjustment expense ratio |
|
71.1 |
% |
64.9 |
% |
63.4 |
% |
62.4 |
% | ||||
Underwriting expense ratio |
|
28.7 |
|
29.6 |
|
28.3 |
|
29.5 |
| ||||
Combined ratio |
|
99.8 |
% |
94.5 |
% |
91.7 |
% |
91.9 |
% | ||||
Incremental impact of direct to consumer initiative on combined ratio |
|
1.5 |
% |
1.6 |
% |
1.6 |
% |
1.7 |
% |
Overview
Operating income in the second quarter of 2014 was $75 million, $67 million or 47% lower than operating income of $142 million in the same period of 2013. The decrease in operating income primarily reflected the pretax impacts of lower net favorable prior year reserve development and an increase in catastrophe losses. Catastrophe losses in the second quarters of 2014 and 2013 were $190 million and $146 million, respectively. Net favorable prior year reserve development in the second quarters of 2014 and 2013 was $12 million and $65 million, respectively. Underlying underwriting margins in the second quarter of 2014 were level with the same period of 2013, as the pretax impacts of (i) lower commission expense, (ii) earned pricing that exceeded loss cost trends and (iii) lower general and administrative expenses were offset by (iv) higher non-catastrophe weather-related losses and (v) the impact of a higher mix of new business versus renewal business. Partially offsetting this net pretax decrease in operating income was the related reduction in income tax expense. In addition, operating income in the second quarter of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the second quarter of 2014 decreased from the same period of 2013. This resulted from interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income, partially offset by the impact of the resolution of prior year tax matters in the second quarter of 2013.
Operating income in the first six months of 2014 was $343 million, $4 million or 1% higher than operating income of $339 million in the same period of 2013. The increase in operating income primarily reflected the pretax impacts of (i) higher underlying underwriting margins and (ii) an increase in net favorable prior year reserve development, partially offset by (iii) an increase in catastrophe losses. Catastrophe losses in the first six months of 2014 were $255 million, compared with $210 million in the same period of 2013. Net favorable prior year reserve development in the first six months of 2014 was $144 million, compared with $125 million in the same period of 2013. The higher underlying underwriting margins resulted from the same factors discussed above for the second quarter. Partially offsetting this net pretax increase in operating income was the related increase in income tax expense. In addition, operating income in the first six months of 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in the first six months of 2014 increased over the same period of 2013. This resulted from the impact of the resolution of prior year tax matters in the second quarter of 2013.
Earned Premiums
Earned premiums in the second quarter of 2014 were $1.77 billion, $61 million or 3% lower than in the same period of 2013. Earned premiums in the first six months of 2014 were $3.54 billion, $139 million or 4% lower than in the same period of 2013. The decreases in both periods of 2014 reflected lower net written premiums over the preceding twelve months.
Net Investment Income
Net investment income in the second quarter of 2014 was $94 million, level with the same period of 2013. Net investment income in the first six months of 2014 was $194 million, $9 million or 5% higher than in the same period of 2013. Refer to the Net Investment Income section of the Consolidated Results of Operations discussion herein for a description of the factors contributing to the changes in the Companys consolidated net investment income in the second quarter and first six months of 2014 compared with the same periods of 2013. In addition, refer to note 2 of notes to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of the Companys net investment income allocation methodology.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2014 were $1.26 billion, $71 million or 6% higher than in the same period of 2013. The increase primarily reflected (i) lower net favorable prior year reserve development, (ii) an increase in catastrophe losses, (iii) higher non-catastrophe weather-related losses and (iv) the impact of loss cost trends, partially offset by (v) the impact of lower volumes of insured exposures. Net favorable prior year reserve development in the second quarter of 2014 was primarily driven by better than expected loss experience in the Homeowners and Other product line for accident year 2013 for non-catastrophe weather-related losses. Net favorable prior year reserve development in the second quarter of 2013 was primarily driven by better than expected loss experience in the Homeowners and Other product line for accident year 2012 for both catastrophe and non-catastrophe weather-related losses and other non-weather-related losses.
Claims and claim adjustment expenses in the first six months of 2014 were $2.24 billion, $52 million or 2% lower than in the same period of 2013, The decrease primarily reflected (i) the impact of lower volumes of insured exposures and (ii) higher net favorable prior year reserve development, partially offset by (iii) an increase in catastrophe losses, (iv) higher non-catastrophe weather-related losses and (v) the impact of loss cost trends. Net favorable prior year reserve development in the first six months of 2014 and 2013 was primarily driven by the same factors described above for the second quarter of each year. The year-to-date total in 2014 also included net favorable prior year reserve development in the first quarter of 2014 in the Homeowners and Other product line for accident years 2011 through 2013 for catastrophe losses. The year-to-date total in 2013 also included net favorable development in the first quarter of 2013 in the Homeowners and Other product line for accident year 2011 for both non-catastrophe weather-related losses and catastrophe losses.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2014 was $290 million, $32 million or 10% lower than in the same period of 2013. Amortization of deferred acquisition costs in the first six months of 2014 was $582 million, $70 million or 11% lower than in the same period of 2013. The decreases in both periods of 2014 primarily reflected a decline in commission expense due to lower commission rates, as well as lower premium volume.
General and Administrative Expenses
General and administrative expenses in the second quarter of 2014 were $237 million, $4 million or 2% lower than in the same period of 2013. General and administrative expenses in the first six months of 2014 were $460 million, $13 million or 3% lower than in the same period of 2013. The decreases in both periods of 2014 primarily reflected the impact of the Companys expense reduction initiatives.
Income Tax Expense
Income tax expense in the second quarter of 2014 was $21 million, $27 million lower than in the same period of 2013 primarily reflecting the tax effect of the $94 million decrease in pre-tax operating income, partially offset by the impact of a $5 million reduction in income tax expense in the second quarter of 2013 resulting from the resolution of prior year tax matters. Income tax expense in the first six months of 2013 was $147 million, $11 million higher than in the same period of 2013, primarily reflecting the impact of the resolution of prior year tax matters in the second quarter of 2013.
Combined Ratio
The combined ratio of 99.8% in the second quarter of 2014 was 5.3 points higher than the combined ratio of 94.5% in the same period of 2013. The combined ratio of 91.7% in the first six months of 2014 was 0.2 points lower than the combined ratio of 91.9% in the same period of 2013. The increase in the second quarter of 2014 primarily reflected the impacts of lower net favorable prior year reserve development and higher catastrophe losses. The decrease in the first six months of 2014 primarily reflected the impacts of a lower underwriting expense ratio, largely offset by a higher loss and loss adjustment expense ratio primarily driven by higher catastrophe losses.
The loss and loss adjustment expense ratio of 71.1% in the second quarter of 2014 was 6.2 points higher than the loss and loss adjustment expense ratio of 64.9% in the same period of 2013. Catastrophe losses accounted for 10.7 points and 8.0 points of the loss and loss adjustment expense ratios in the second quarters of 2014 and 2013, respectively. Net favorable prior year reserve development in the second quarters of 2014 and 2013 provided 0.7 points and 3.5 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 second quarter underlying loss and loss adjustment expense ratio was 0.7 points higher than the 2013 ratio on the same basis, primarily reflecting the factors impacting underlying underwriting margins discussed in the Overview section above.
The loss and loss adjustment expense ratio of 63.4% in the first six months of 2014 was 1.0 points higher than the loss and loss adjustment expense ratio of 62.4% in the same period of 2013. Catastrophe losses accounted for 7.2 points and 5.7 points of the loss and loss adjustment expense ratios in the first six months of 2014 and 2013, respectively. Net favorable prior year reserve development in the first six months of 2014 and 2013 provided 4.1 points and 3.4 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 six-month underlying loss and loss adjustment expense ratio was 0.2 points higher than the 2013 ratio on the same basis, primarily reflecting the same factors discussed above for the second quarter of 2014.
The underwriting expense ratio of 28.7% for the second quarter of 2014 was 0.9 points lower than the underwriting expense ratio of 29.6% in the same period of 2013. In the first six months of 2014, the underwriting expense ratio of 28.3% was 1.2 points lower than the underwriting expense ratio of 29.5% in the same 2013 period. The decreases in both periods of 2014 primarily reflected lower commission expense due to lower commission rates.
Agency Written Premiums
Personal Insurances gross and net written premiums by product line were as follows for its Agency business, which comprises business written through agents, brokers and other intermediaries and represents almost all of the Personal Insurance segments gross and net written premiums:
|
|
Gross Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Agency Automobile |
|
$ |
834 |
|
$ |
838 |
|
$ |
1,629 |
|
$ |
1,673 |
|
Agency Homeowners and Other |
|
1,036 |
|
1,119 |
|
1,847 |
|
2,008 |
| ||||
Total Agency Personal Insurance |
|
$ |
1,870 |
|
$ |
1,957 |
|
$ |
3,476 |
|
$ |
3,681 |
|
|
|
Net Written Premiums |
| ||||||||||
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Agency Automobile |
|
$ |
831 |
|
$ |
834 |
|
$ |
1,619 |
|
$ |
1,665 |
|
Agency Homeowners and Other |
|
1,016 |
|
1,033 |
|
1,804 |
|
1,853 |
| ||||
Total Agency Personal Insurance |
|
$ |
1,847 |
|
$ |
1,867 |
|
$ |
3,423 |
|
$ |
3,518 |
|
In the second quarter and first six months of 2014, gross agency written premiums were 4% and 6% lower than in the respective periods of 2013. In the second quarter and first six months of 2014, net agency written premiums were 1% and 3% lower than in the respective periods of 2013. Renewal rate changes continued to exceed expected loss cost trends, assuming weather patterns consistent with the Companys expectations.
In the second quarter of 2014, net written premiums in the Agency Automobile line of business were virtually level with the same period of 2013. In the first six months of 2014, net written premiums in the Agency Automobile line of business were 3% lower than in the same period of 2013. Business retention rates remained strong in both periods of 2014 and were higher than in the respective periods of 2013. Renewal premium changes remained positive in the second quarter and first six months of 2014 but were lower than in the same periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter and first six months of 2014 were significantly higher than in the same periods of 2013 as a result of the Companys new private passenger automobile product, Quantum Auto 2.0.
In the second quarter of 2014, net written premiums in the Agency Homeowners and Other line of business were 2% lower than in the same period of 2013. In the first six months of 2014, net written premiums in the Agency Homeowners and Other line of business were 3% lower than in the same period of 2013. Business retention rates remained strong in both periods of 2014 and were higher than in the respective periods of 2013. Renewal premium changes remained positive in the second quarter and first six months of 2014 but were lower than in the respective periods of 2013, primarily due to lower renewal rate changes. New business premiums in the second quarter and first six months of 2014 were higher than in the same periods of 2013.
For its Agency business, the Personal Insurance segment had approximately 6.1 million and 6.5 million active policies at June 30, 2014 and 2013, respectively.
Direct to Consumer Written Premiums
In the direct to consumer business, net written premiums in the second quarter and first six months of 2014 were $46 million and $89 million, respectively, compared with $40 million and $79 million in the respective periods of 2013. In the second quarter and first six months of 2014, automobile net written premiums increased by 15% and 11% over the respective periods of 2013, and homeowners and other net written premiums increased by 15% and 17% over the respective periods of 2013. The direct to consumer business had 176,000 and 162,000 active policies at June 30, 2014 and 2013, respectively.
Interest Expense and Other
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating loss |
|
$ |
(65 |
) |
$ |
(59 |
) |
$ |
(129 |
) |
$ |
(122 |
) |
The operating loss for Interest Expense and Other in the second quarter of 2014 was $65 million, compared with $59 million in the same period of 2013. The operating loss for Interest Expense and Other in the first six months of 2014 was $129 million, compared with $122 million in the same period of 2013. After-tax interest expense in the second quarter and first six months of 2014 was $60 million and $120 million, respectively, compared with $56 million and $116 million, respectively, in the same periods of 2013. The increases in interest expense in both periods of 2014 reflected higher average levels of debt outstanding.
ASBESTOS CLAIMS AND LITIGATION
The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims from the Companys policyholders (which includes others seeking coverage under a policy). Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the continued focus by plaintiffs on defendants who were not traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. In addition to contributing to the overall number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Companys asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.
The Company continues to be involved in coverage litigation concerning a number of policyholders, some of whom have filed for bankruptcy, who in some instances have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage. In these instances, policyholders also may assert that each individual bodily injury claim should be treated as a separate occurrence under the policy. It is difficult to predict whether these policyholders will be successful on both issues. To the extent both issues are resolved in a policyholders favor and other Company defenses are not successful, the Companys coverage obligations under the policies at issue would be materially increased and bounded only by the applicable per-occurrence limits and the number of asbestos bodily injury claims against the policyholders. Although the Company has seen a moderation in the overall risk associated with these lawsuits, it remains difficult to predict the ultimate cost of these claims.
Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company but which could result in settlements for larger amounts than originally anticipated. There also may be instances where a court may not approve a proposed settlement, which may result in additional litigation and potentially less beneficial outcomes for the Company. As in the past, the Company will continue to pursue settlement opportunities.
In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions.
TPC had entered into settlement agreements, which are subject to a number of contingencies, in connection with a number of these direct action claims (Direct Action Settlements). For a full discussion of these settlement agreements, see the Asbestos Direct Action Litigation section of note 11 of notes to the unaudited consolidated financial statements herein.
The Companys quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders in the Home Office, Field Office and Assumed Reinsurance and Other categories as well as projected reinsurance billings and recoveries. In addition, the Company reviews
its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves nor have the Companys evaluations resulted in any way of determining a meaningful average asbestos defense or indemnity payment.
Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually. Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholders potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.
Net asbestos paid loss and loss expenses in the first six months of 2014 were $100 million, compared with $99 million in the same period of 2013. Net asbestos reserves were $2.25 billion at June 30, 2014, compared with $2.28 billion at June 30, 2013.
The following table displays activity for asbestos losses and loss expenses and reserves:
(at and for the six months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
Beginning reserves: |
|
|
|
|
| ||
Gross |
|
$ |
2,606 |
|
$ |
2,689 |
|
Ceded |
|
(256 |
) |
(311 |
) | ||
Net |
|
2,350 |
|
2,378 |
| ||
|
|
|
|
|
| ||
Incurred losses and loss expenses: |
|
|
|
|
| ||
Gross |
|
|
|
|
| ||
Ceded |
|
|
|
|
| ||
Net |
|
|
|
|
| ||
|
|
|
|
|
| ||
Paid loss and loss expenses: |
|
|
|
|
| ||
Gross |
|
124 |
|
122 |
| ||
Ceded |
|
(24 |
) |
(23 |
) | ||
Net |
|
100 |
|
99 |
| ||
|
|
|
|
|
| ||
Foreign exchange and other: |
|
|
|
|
| ||
Gross |
|
|
|
(1 |
) | ||
Ceded |
|
|
|
|
| ||
Net |
|
|
|
(1 |
) | ||
|
|
|
|
|
| ||
Ending reserves: |
|
|
|
|
| ||
Gross |
|
2,482 |
|
2,566 |
| ||
Ceded |
|
(232 |
) |
(288 |
) | ||
Net |
|
$ |
2,250 |
|
$ |
2,278 |
|
See Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.
ENVIRONMENTAL CLAIMS AND LITIGATION
The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these claims are due to various legislative as well as regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), enacted in 1980 and later modified, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal
statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties.
The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1980s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims, when submitted, rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.
The resolution of environmental exposures by the Company generally occurs through settlements with policyholders as opposed to claimants. Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a buy-back of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which extinguish any liability arising from known specified sites or claims. Where appropriate, these agreements also include indemnities and hold harmless provisions to protect the Company. The Companys general purpose in executing these agreements is to reduce the Companys potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.
In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. The evaluation of the exposure presented by a policyholder can change as information concerning that policyholder and the many variables presented is developed. Conventional actuarial techniques are not used to estimate these reserves.
In its review of environmental reserves, the Company considers: past settlement payments; changing judicial and legislative trends; its reserves for the costs of litigating environmental coverage matters; the potential for policyholders with smaller exposures to be named in new clean-up actions for both on- and off-site waste disposal activities; the potential for adverse development; the potential for additional new claims beyond previous expectations; and the potential higher costs for new settlements.
The duration of the Companys investigation and review of these claims and the extent of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company vary significantly and are dependent upon a number of factors. These factors include, but are not limited to, the cooperation of the policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of coverage litigation between the policyholder and the Company and the willingness of the policyholder and the Company to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Because these factors vary from claim-to-claim and policyholder-by-policyholder, the Company cannot provide a meaningful average of the duration of an environmental claim. However, based upon the Companys experience in resolving these claims, the duration may vary from months to several years.
The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has
experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated. As a result of these factors, the Company increased its net environmental reserves by $87 million and $65 million in the second quarters of 2014 and 2013, respectively.
Net environmental paid loss and loss expenses in the first six months of 2014 were $49 million, compared with $24 million in the same period of 2013. At June 30, 2014, approximately 93% of the net environmental reserve (approximately $354 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Companys experience in resolving those claims. The balance, approximately 7% of the net environmental reserve (approximately $28 million), consists of case reserves.
The following table displays activity for environmental losses and loss expenses and reserves:
(at and for the six months ended June 30, in millions) |
|
2014 |
|
2013 |
| ||
Beginning reserves: |
|
|
|
|
| ||
Gross |
|
$ |
355 |
|
$ |
352 |
|
Ceded |
|
(11 |
) |
(5 |
) | ||
Net |
|
344 |
|
347 |
| ||
|
|
|
|
|
| ||
Incurred losses and loss expenses: |
|
|
|
|
| ||
Gross |
|
94 |
|
72 |
| ||
Ceded |
|
(7 |
) |
(7 |
) | ||
Net |
|
87 |
|
65 |
| ||
|
|
|
|
|
| ||
Paid loss and loss expenses: |
|
|
|
|
| ||
Gross |
|
53 |
|
25 |
| ||
Ceded |
|
(4 |
) |
(1 |
) | ||
Net |
|
49 |
|
24 |
| ||
|
|
|
|
|
| ||
Foreign exchange and other: |
|
|
|
|
| ||
Gross |
|
|
|
|
| ||
Ceded |
|
|
|
|
| ||
Net |
|
|
|
|
| ||
|
|
|
|
|
| ||
Ending reserves: |
|
|
|
|
| ||
Gross |
|
396 |
|
399 |
| ||
Ceded |
|
(14 |
) |
(11 |
) | ||
Net |
|
$ |
382 |
|
$ |
388 |
|
UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and managements judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of
disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Companys previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Companys ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments. (Also see note 11 of notes to the unaudited consolidated financial statements in this report).
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Companys current reserves. In addition, the Companys estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Companys operating results in future periods.
INVESTMENT PORTFOLIO
The Companys invested assets at June 30, 2014 were $73.94 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The carrying value of the Companys fixed maturity portfolio at June 30, 2014 was $64.58 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Companys insurance and debt obligations. The weighted average credit quality of the Companys fixed maturity portfolio, both including and excluding U.S. Treasury securities, was Aa2 at both June 30, 2014 and December 31, 2013. Below investment grade securities represented 3.0% of the total fixed maturity investment portfolio at both June 30, 2014 and December 31, 2013. The average effective duration of fixed maturities and short-term securities was 3.5 (3.7 excluding short-term securities) at June 30, 2014 and 3.7 (3.9 excluding short-term securities) at December 31, 2013. See the Outlook section in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Obligations of States, Municipalities and Political Subdivisions
The Companys fixed maturity investment portfolio at June 30, 2014 and December 31, 2013 included $35.03 billion and $35.56 billion, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at June 30, 2014 and December 31, 2013 were $8.46 billion and $9.52 billion, respectively, of pre-refunded bonds, which are 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. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee.
The Company bases its investment decision on the underlying credit characteristics of the municipal security. While its municipal bond portfolio includes a number of securities that were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default, the Company does not rely on enhanced credit characteristics provided by such third-party insurance as part of its investing decisions. Of the insured municipal securities in the Companys investment portfolio at June 30, 2014, approximately 99% were rated at A3 or above, and approximately 87% were rated at Aa3 or above, without the benefit of insurance. The Company believes that a loss of the benefit of insurance would not result in a material adverse impact on the Companys results of operations, financial position or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the Companys ability and intent to hold the securities. The average credit rating of the underlying issuers of these securities was Aa2 at June 30, 2014. The average credit rating of the entire municipal bond portfolio was Aa1 at June 30, 2014 with and without the enhancement provided by third-party insurance.
Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities
The Companys fixed maturity investment portfolio at June 30, 2014 and December 31, 2013 included $2.33 billion and $2.42 billion, respectively, of residential mortgage-backed securities, including pass-through-securities and collateralized mortgage obligations (CMO), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Companys investment strategy generally favors securities that reduce this risk within expected interest rate ranges. Included in the totals at June 30, 2014 and December 31, 2013 were $970 million and $1.06 billion, respectively, of GNMA, FNMA and FHLMC (excluding FHA project loans) guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.36 billion at both June 30, 2014 and December 31, 2013. Approximately 43% and 42% of the Companys CMO holdings at June 30, 2014 and December 31, 2013, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The average credit rating of the $765 million and $790 million of non-guaranteed CMO holdings at June 30, 2014 and December 31, 2013, respectively, was Ba2 and Ba3, respectively. The average credit rating of all of the above securities was Aa3 and A1 at June 30, 2014 and December 31, 2013, respectively.
The Company makes investments in residential CMOs that are either guaranteed by GNMA, FNMA or FHLMC, or if not guaranteed, are senior or super-senior positions within their respective securitizations. Both guaranteed and non-guaranteed residential CMOs allocate the distribution of payments from the underlying mortgages among different classes of bondholders. In addition, non-guaranteed residential CMOs provide structures that allocate the impact of credit losses to different classes of bondholders. Senior and super-senior CMOs are protected, to varying degrees, from credit losses as those losses are initially allocated to subordinated bondholders. The Companys investment strategy is to purchase CMO tranches that are expected to offer the most favorable return given the Companys assessment of associated risks. The Company does not purchase residual interests in CMOs.
Alternative Documentation Mortgages and Sub-Prime Mortgages
At June 30, 2014 and December 31, 2013, the Companys fixed maturity investment portfolio included CMOs backed by alternative documentation mortgages and asset-backed securities collateralized by sub-prime mortgages with a collective fair value of $274 million and $293 million, respectively (comprising less than 1% of the Companys total fixed maturity investments at both dates). The Company defines sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios. Alternative documentation securitizations are those in which the underlying loans primarily meet the government-sponsored entities requirements for credit score but do not meet the government-sponsored entities guidelines for documentation, property type, debt and loan-to-value ratios. The average credit rating on these securities and obligations held by the Company was Ba2 at both June 30, 2014 and December 31, 2013. The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolios relatively small size.
Commercial Mortgage-Backed Securities and Project Loans
At June 30, 2014 and December 31, 2013, the Company held commercial mortgage-backed securities (including FHA project loans) of $513 million and $475 million, respectively. The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolios relatively small size and the underlying credit strength of these securities.
Equity Securities Available for Sale, Real Estate and Short-Term Investments
See note 1 of notes to the Companys consolidated financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 for further information about these invested asset classes.
Other Investments
The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures, which are subject to more volatility than the Companys fixed maturity investments. These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility. At June 30, 2014 and December 31, 2013, the carrying value of the Companys other investments was $3.61 billion and $3.44 billion, respectively.
CATASTROPHE REINSURANCE COVERAGE
The Companys catastrophe reinsurance coverage is discussed in the Catastrophe Reinsurance section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013. Except as discussed below, there have been no material changes to the Companys catastrophe reinsurance coverage from that reported in the Annual Report.
General Catastrophe Reinsurance Treaty. The Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to help manage its exposure to losses resulting from catastrophes. The general catastrophe reinsurance treaty covers the accumulation of net property losses arising out of one occurrence. The treaty covers all of the Companys exposures in the United States and Canada and their possessions, and waters contiguous thereto, and the Caribbean and Mexico. The treaty only provides coverage for terrorism events in limited circumstances and excludes entirely losses arising from nuclear, biological, chemical or radiological attacks.
The following table summarizes the Companys coverage under its General Catastrophe Reinsurance Treaty, effective for the period July 1, 2014 through June 30, 2015, as well as certain other catastrophe-related coverages, other than coverage related to the General Catastrophe Aggregate Excess-of-Loss Treaty which is described in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
Layer of Loss |
|
Reinsurance Coverage In-Force |
$0 - $1.5 billion |
|
Loss 100% retained by the Company, except for certain losses covered by the Earthquake Excess-of-Loss Reinsurance Treaty as described below. Additionally, certain losses incurred in the Northeastern United States are covered by the reinsurance agreements related to the Catastrophe Bonds as described below. |
|
|
|
$1.5 billion - $2.25 billion |
|
53.3% ($400 million) of loss covered by treaty; 46.7% ($350 million) of loss retained by the Company. Additionally, certain losses incurred in the Northeastern United States are covered by the reinsurance agreements related to the Catastrophe Bonds as described below. |
|
|
|
Greater than $2.25 billion |
|
100% of loss retained by the Company, except for certain losses incurred in the Northeastern United States, which are covered by the reinsurance agreements related to the Catastrophe Bonds and Northeast General Catastrophe Reinsurance Treaty as described below. |
Catastrophe Bonds. The Company has catastrophe protection through two indemnity reinsurance agreements with Long Point Re III Ltd. (Long Point Re III), an independent Cayman Islands company licensed as a Class B insurer in the Cayman Islands. The reinsurance agreements expire in June 2015 and May 2016, respectively and provide coverage to the Company for certain losses from a hurricane in the northeastern United States. Both reinsurance agreements meet the requirements to be accounted for as reinsurance in accordance with the guidance for reinsurance contracts. In connection with each reinsurance agreement, Long Point Re III issued notes (generally referred to as catastrophe bonds) to investors in an amount equal to the full coverage provided under the respective reinsurance agreement as described below.
The attachment point, maximum limit and insurance percentage under the Companys reinsurance agreement with Long Point Re III that expires in June 2015 were reset in April 2014. Accordingly, for the period May 1, 2014 through June 6, 2015, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the losses in the covered area for a single occurrence reach an initial attachment amount of $1.772 billion. The full $250 million coverage amount is available on a proportional basis until covered losses reach a maximum $2.331 billion.
The attachment point, maximum limit and insurance percentage under the Companys reinsurance agreement with Long Point Re III that expires in May 2016 were also reset in April 2014. Accordingly, for the period May 17, 2014 through May 16, 2015, the Company will be entitled to begin recovering amounts under the reinsurance agreement if the losses in the covered area for a single occurrence reach an initial attachment amount of $1.222 billion. The full $300 million coverage amount is available on a proportional basis until covered losses reach a maximum $1.772 billion.
The business covered by these reinsurance agreements is a subset of the Companys overall insurance portfolio, comprising property insurance and related coverages spread across the following geographic locations: Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Vermont. The coverage under both reinsurance agreements is limited to specified property coverage written in the Companys Personal Insurance segment, and within the Select Accounts and the Commercial Accounts market groups within the Companys Business Insurance segment.
See the Catastrophe Reinsurance section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 for more details, including a discussion of the structure of and accounting for Long Point Re III.
Other Catastrophe Reinsurance Treaties. In addition to its general catastrophe treaty and its multi-year catastrophe bonds, the Company also is party to a northeast general catastrophe reinsurance treaty, a general catastrophe aggregate excess-of-loss reinsurance treaty, two earthquake excess-of-loss reinsurance treaties and several international reinsurance treaties.
· Northeast General Catastrophe Reinsurance Treaty. The northeast general catastrophe treaty provides up to $850 million of coverage, subject to a $2.25 billion retention, for certain losses arising from hurricanes, tornados, hail storms, earthquakes and winter storm or freeze losses from Virginia to Maine for the period July 1, 2014 through June 30, 2015. Losses from a covered event (occurring over several days) anywhere in the United States, Canada, the Caribbean and Mexico and waters contiguous thereto may be used to satisfy the retention. Recoveries under the catastrophe bonds (if any) would be first applied to reduce losses subject to this treaty.
· General Catastrophe Aggregate Excess-of-Loss Reinsurance Treaty See the Catastrophe Reinsurance section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
· Business Insurance Earthquake Excess-of-Loss Reinsurance Treaty. This earthquake excess-of-loss treaty provides for up to $150 million part of $165 million of coverage, subject to a $60 million retention, for losses arising from an earthquake, including fire following and sprinkler leakage incurred under policies written by the Technology and Public Sector business units and the Commercial Accounts market group in the Companys Business Insurance segment for the period July 1, 2014 through June 30, 2015.
· Personal Insurance Earthquake Excess-of-Loss Reinsurance Treaty. See the Catastrophe Reinsurance section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
· Canadian Property Catastrophe Excess-of-Loss Reinsurance Contract. This contract, effective for the period July 1, 2014 through and including June 30, 2015, covers the accumulation of net property losses arising out of one occurrence on business written by the Companys Canadian businesses. The treaty covers habitational property, commercial property, inland marine, ocean marine and auto physical damages exposures written by the Companys Canadian businesses with respect to risks located worldwide, written for Canadian insureds. The treaty provides coverage for 100% of loss retained in excess of C$50 million, up to C$900 million.
· Other International Reinsurance Treaties. See the Catastrophe Reinsurance section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
The Company regularly reviews its catastrophe reinsurance coverage and may adjust such coverage in the future.
REINSURANCE RECOVERABLES
For a description of the Companys reinsurance recoverables, refer to Reinsurance Recoverables in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
The following table summarizes the composition of the Companys reinsurance recoverables:
(in millions) |
|
June 30, |
|
December 31, |
| ||
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses |
|
$ |
4,576 |
|
$ |
4,707 |
|
Allowance for uncollectible reinsurance |
|
(239 |
) |
(239 |
) | ||
Net reinsurance recoverables |
|
4,337 |
|
4,468 |
| ||
Mandatory pools and associations |
|
1,878 |
|
1,897 |
| ||
Structured settlements |
|
3,293 |
|
3,348 |
| ||
Total reinsurance recoverables |
|
$ |
9,508 |
|
$ |
9,713 |
|
The $131 million decline in net reinsurance recoverables from December 31, 2013 primarily reflected the impact of net favorable prior year reserve development and cash collections, as well as a slightly lower level of reinsurance purchased in the first six months of 2014.
OUTLOOK
The following discussion provides outlook information for certain key drivers of the Companys results of operations and capital position.
Premiums. The Companys earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the life of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of the Business Insurance segment, affect audit premium adjustments, policy endorsements and mid-term cancellations. Net written premiums are also impacted by the structure of reinsurance programs and related costs.
Given the possibility that more active weather patterns such as the Company experienced in a number of recent periods may continue, as well as the possibility that interest rates may remain low for some period of time, along with the current level of profitability in certain of its product lines, the Company has undertaken various efforts, and expects to undertake additional efforts, to improve its underwriting margins. These efforts include seeking improved rates where the Company believes it is appropriate, as well as improved terms and conditions, on many of its insurance products, and also include other initiatives, such as reducing operating expenses and acquisition costs. In the Agency Automobile line of business, given new business levels, the Company has undertaken various actions (which are discussed in more detail in the Underwriting Gain/Loss section below) to reduce expenses and costs in order to improve underwriting margins and enable it to have a more
competitively priced product. These and other actions to improve profitability with respect to Agency Automobile or the Companys other business units may not be successful and/or may result in lower retention and new business levels and therefore lower business volumes. If these actions are not effective, the Company may need to explore other actions or initiatives to improve its competitive position and profitability. Refer to Part IItem 1ARisk FactorsThe intense competition that we face could harm our ability to maintain or increase our business volumes and our profitability and Disruptions to our relationships with our independent agents and brokers could adversely affect us in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong relative to historical experience. In the Business Insurance segment, the Company expects that renewal premium changes during the remainder of 2014 and into 2015 will remain positive, driven by both positive renewal rate changes and, subject to the economic uncertainties discussed below, growth in insured exposures, but will be slightly lower than the levels attained in the first six months of 2014. In the Financial, Professional & International Insurance segment, the Company expects that renewal premium changes during the remainder of 2014 and into 2015 will be broadly consistent with the first six months of 2014. With respect to surety, the Company expects net written premium volume in 2014 and into 2015 that is broadly consistent with the levels attained in the comparable periods of 2013 and 2014. With respect to International business, the Company expects the level of net written premiums generated by Dominion in the remainder of 2014 and into the first half of 2015 will be broadly consistent with the level attained in the first half of 2014. In the Personal Insurance segment, the Company expects both Agency Automobile and Agency Homeowners and Other renewal premium changes during the remainder of 2014 and into 2015 will decline as compared to the first six months of 2014, but the Company expects such renewal premium changes will remain positive and renewal rate changes will exceed underlying loss cost trends, assuming weather patterns and other loss trends consistent with the Companys expectations. Renewal premium changes for both Agency Automobile and Agency Homeowners and Other in the remainder of 2014 and into 2015 are expected to be driven by both positive renewal rate changes (based on the Companys actions to file for rate increases) and, subject to the economic uncertainties discussed below, growth in insured exposures. The need for state regulatory approval for changes to personal property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.
The pricing environment for new business generally has less of an impact on underwriting profitability than renewal rate changes, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, the impact of a higher mix of new business versus renewal business may negatively impact underwriting profitability. Property and casualty insurance market conditions are expected to remain competitive during the remainder of 2014 and into 2015 for new business, not only in Business Insurance and Financial, Professional & International Insurance, but especially in Personal Insurance, where price comparison technology used by agents and brokers, sometimes referred to as comparative raters, has facilitated the process of generating multiple quotes, thereby increasing price comparison on new business and, increasingly, on renewal business. The Company anticipates that its new Quantum Auto 2.0 product in the Personal Insurance segments Agency Automobile line of business, as discussed below, will continue to increase new business premiums during the remainder of 2014 and into 2015. The Company also anticipates that, as a result of strong business retentions and increases in new business, by the end of 2014 or early into 2015 policies in force in the Personal Insurance segments Agency Automobile line of business will begin to increase compared with the corresponding prior year period.
Modest economic growth in the United States experienced in recent periods may or may not continue, or may continue at a slower rate for an extended period of time. Further, general uncertainty regarding the U.S. Federal budget and taxes, implementation of the Affordable Care Act and the regulatory environment has added to the uncertainty regarding economic conditions generally. If weak economic conditions persist or deteriorate, the resulting low levels of economic activity could impact exposure changes at renewal and the Companys ability to write business at acceptable rates. Additionally, low levels of economic activity could adversely impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could adversely impact net written premiums during the remainder of 2014 and into 2015, and because earned premiums are a function of net written premiums, earned premiums could be adversely impacted during the remainder of 2014 and into 2015.
Underwriting Gain/Loss. The Companys underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins.
Catastrophe and other weather-related losses are inherently unpredictable from period to period. The Company experienced significant catastrophe and other weather-related losses in a number of recent periods which adversely impacted its results of operations. The Companys results of operations would continue to be adversely impacted if significant catastrophe and other weather-related losses were to occur during the remainder of 2014 and into 2015.
For the last several years, the Companys results have included significant amounts of net favorable prior year reserve development, although at lower levels in some recent years, driven by better than expected loss experience in all of the Companys segments. The lower level of net favorable prior year reserve development in a number of recent periods may have been in part due to the Companys reserve estimation process incorporating those factors that led to the higher levels of net favorable prior year reserve development in previous years. If that trend continues, the better than expected loss experience may continue at these recent lower levels, or even lower levels. However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development in future periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.
It is possible that the steps taken by the federal government, particularly the Federal Reserve, to stabilize financial markets and improve economic conditions could lead to higher inflation than the Company had anticipated, which could in turn lead to an increase in the Companys loss costs. The impact of inflation on loss costs could be more pronounced for those lines of business that are considered long tail, such as general liability, as they require a relatively long period of time to finalize and settle claims for a given accident year. For a further discussion, see If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, our financial results could be materially and adversely affected included in Part IItem IARisk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
In Business Insurance, the Company expects that the anticipated impact of increases in renewal premium changes, partially offset by consistent modest loss cost trends, will likely result in underlying underwriting margins during the remainder of 2014 that are higher than in the corresponding period of 2013, and underlying underwriting margins into 2015 that approximate those in the corresponding period of 2014. In making this comparison, the Company has excluded the impact of the $76 million reduction in the estimated liability for state assessments to be paid by the Company related to workers compensation premiums in the first quarter of 2014 and the Company has assumed that weather patterns will be consistent with the Companys expectations.
In Financial, Professional & International Insurance, the Company expects underlying underwriting margins during the remainder of 2014 and into 2015 will be broadly consistent with the full year of 2013 as the anticipated impact of recent underwriting actions and positive renewal premium changes will be offset by consistent modest loss cost trends and the inclusion of Dominion. This also assumes that weather patterns and what the Company defines as large losses are consistent with the Companys expectations. While the Company is taking actions to improve profitability at Dominion, it will be a number of years before these actions, to the extent successful, will be fully realized.
In Personal Insurance, the Company anticipates underlying underwriting margins during the remainder of 2014 and into 2015 that are broadly consistent with the corresponding periods of 2013 and 2014. In Agency Automobile, the Company expects that underlying underwriting margins during the remainder of 2014 will be slightly higher than in the corresponding period of 2013, and underlying underwriting margins into the first half of 2015 will approximate those in the corresponding period of 2014. These expectations reflect, among other things, the anticipated impact of continued positive renewal premium changes, the Companys announced plan to reduce certain claim adjustment and other insurance expenses, anticipated loss cost trends and the impact of a higher mix of new business versus renewal business. In Agency Homeowners and Other, the Company anticipates lower underlying underwriting margins during the remainder of 2014 compared with the corresponding period of 2013, and underlying underwriting margins into the first half of 2015 that approximate those in the corresponding period of 2014, reflecting non-catastrophe weather-related loss levels and loss cost trends consistent with the Companys expectations, partially offset by the anticipated impact of continued positive renewal premium changes. Also in Personal Insurance, the Companys direct to consumer initiative, the distribution channel that the Company launched in 2009, while intended to enhance the Companys long-term ability to compete successfully in a consumer-driven marketplace, is expected to remain unprofitable for a number of years as this book of business grows and matures.
The Agency Automobile line of business has been negatively impacted by various factors, including the use of price comparison technology by agents and brokers as discussed above. The Companys actions in response to these factors include, among other things, an announced plan to reduce certain claim adjustment and other insurance expenses, with the majority of the impact in the Agency Automobile line of business. That plan is intended to result in savings of approximately $140 million pre-tax per year by 2015 when fully implemented. That plan resulted in restructuring charges of $12 million in 2013 and $3 million in the first six months of 2014. No additional significant restructuring charges are expected to be incurred related to this plan. Additionally, in the fourth quarter of 2013, the Company launched a new private passenger automobile product, Quantum Auto 2.0. This product, in addition to incorporating the cost savings described above, has a lower base commission rate than the Companys existing Quantum Auto 1.0 product. These changes in cost structure are intended to enable the Company to price Quantum Auto 2.0 more competitively while generating an expected appropriate return. By June 30, 2014, the Company had started offering the product in approximately 75% of the states where it plans to offer the product, and the Company currently expects that, by the end of 2014, it will offer the product in approximately 90% of those states. The Company currently intends that, in approved states, all new accounts will be written on the new product; in addition, the product will also be available to agents at their discretion for existing accounts.
Investment Portfolio. The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration. The average effective duration of fixed maturities and short-term securities was 3.5 (3.7 excluding short-term securities) at June 30, 2014. From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. The Company continually evaluates its investment alternatives and mix. Currently, the majority of the Companys investments are comprised of a widely diversified portfolio of high-quality, liquid taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures. These investment classes have the potential for higher returns but also the potential for higher degrees of risk, including less stable rates of return and less liquidity.
Net investment income is a material contributor to the Companys results of operations. Interest rates remain at very low levels by historical standards. Based on the current interest rate environment, the Company estimates that the impact of lower reinvestment yields on the Companys fixed maturity portfolio could, for the remainder of 2014 and into 2015, result in approximately $20 million to $25 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to the corresponding quarters of 2013 and 2014, partially offset by approximately $5 million of incremental quarterly net investment income through November 1, 2014 resulting from the acquisition of Dominion. Given recent general economic and investment market conditions, the Company expects investment income from the non-fixed maturity portfolio during the remainder of 2014 and into 2015 will be lower than in the corresponding periods of 2013 and 2014. If general economic conditions and/or investment market conditions deteriorate during the remainder of 2014 and into 2015, the Company could also experience a further reduction in net investment income and/or significant realized investment losses, including impairments.
The Company had a net pre-tax unrealized investment gain of $2.74 billion ($1.79 billion after-tax) in its fixed maturity investment portfolio at June 30, 2014. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders equity, and a declining interest rate environment would have the opposite effects.
For further discussion of the Companys investment portfolio, see Investment Portfolio. For a discussion of the risks to the Companys business during or following a financial market disruption and risks to the Companys investment portfolio, see the risk factors entitled During or following a period of financial market disruption or economic downturn, our business could be materially and adversely affected and Our investment portfolio may suffer reduced returns or material realized or unrealized losses included in Part IItem 1ARisk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed operating income. In addition, the timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Companys financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Companys desired ratings from independent rating agencies, funding of the Companys qualified pension plan, capital requirements of the Companys operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. For information regarding the Companys common share repurchases in the first six months of 2014, see Liquidity and Capital Resources.
Many of the statements in this Outlook section are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Companys control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them. See Forward Looking Statements. For a discussion of potential risks and uncertainties that could impact the Companys results of operations or financial position, see Item 1ARisk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 and Item 2Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Estimates in this report.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a companys ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed.
Operating Company Liquidity. The liquidity requirements of the Companys insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities. Cash provided from these sources is used primarily for claims and claim adjustment expense payments and operating expenses. The insurance subsidiaries liquidity requirements can be impacted by, among other factors, the timing and amount of catastrophe claims, which are inherently unpredictable, as well as the timing and amount of reinsurance recoveries, which may be affected by reinsurer solvency and reinsurance coverage disputes. Additionally, the variability of asbestos-related claim payments, as well as the volatility of potential judgments and settlements arising out of litigation, may also result in increased liquidity requirements. It is the opinion of the Companys management that the insurance subsidiaries future liquidity needs will be adequately met from all of the sources described above. Subject to restrictions imposed by states in which the Companys insurance subsidiaries are domiciled, the Companys principal insurance subsidiaries pay dividends to their respective parent companies, which in turn pay dividends to the corporate holding (parent) company (TRV).
Holding Company Liquidity. TRVs liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan. At June 30, 2014, TRV held total cash and short-term invested assets in the United States aggregating $1.83 billion and having a weighted average maturity of 56 days. These assets are sufficient to meet TRVs current liquidity requirements and are in excess of TRVs minimum target level, which comprises TRVs estimated annual pretax interest expense and common shareholder dividends, and currently totals approximately $1.1 billion.
TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. U.S. income taxes have not been recognized on substantially all of the Companys foreign operations undistributed earnings as of June 30, 2014, as such earnings are intended to be permanently reinvested in those operations. Furthermore, taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on dividend distributions if such earnings were to be distributed to the holding company. The amount of undistributed earnings from foreign operations and related taxes on those undistributed earnings were not material to the Companys financial position or liquidity at June 30, 2014.
TRV has a shelf registration statement with the Securities and Exchange Commission which permits it to issue securities from time to time. TRV also has a $1.0 billion line of credit facility with a syndicate of financial institutions that expires in June 2018. This line of credit also supports TRVs $800 million commercial paper program, of which $100 million was outstanding at June 30, 2014. TRV is not reliant on its commercial paper program to meet its operating cash flow needs.
The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $171 million, to provide a portion of the capital needed to support its obligations at Lloyds at June 30, 2014. If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may have to seek alternative means of supporting its obligations at Lloyds, which could include utilizing holding company funds on hand.
Operating Activities
Net cash flows provided by operating activities in the first six months of 2014 and 2013 were $1.33 billion and $1.25 billion, respectively. Cash flows in the first six months of 2014 primarily reflected a higher level of collected premiums, partially offset by higher income tax payments.
Investing Activities
Net cash flows provided by investing activities were $487 million and $92 million in the first six months of 2014 and 2013 respectively. The Companys consolidated total investments at June 30, 2014 increased by $781 million, or 1% over year-end 2013, primarily reflecting the impact of net cash flows provided by operating activities and an increase in net unrealized appreciation of investments, partially offset by common share repurchases and dividends paid to shareholders.
The Companys investment portfolio is managed to support its insurance operations; accordingly, the portfolio is positioned to meet obligations to policyholders. As such, the primary goals of the Companys asset-liability management process are to satisfy the insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows. Generally, the expected principal and interest payments produced by the Companys fixed maturity portfolio adequately fund the estimated runoff of the Companys insurance reserves. Although this is not an exact cash flow match in each period, the substantial amount by which the market value of the fixed maturity portfolio exceeds the value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, contributes to the Companys ability to fund claim payments without having to sell illiquid assets or access credit facilities.
Financing Activities
Net cash flows used in financing activities in the first six months of 2014 and 2013 were $1.80 billion and $1.36 billion, respectively. The totals in both periods primarily reflected common share repurchases and dividends to shareholders, partially offset by the proceeds from employee stock option exercises. The first six months of 2013 also included the payment of the Companys $500 million, 5.00% senior notes at maturity.
Dividends. Dividends paid to shareholders were $365 million and $366 million in the first six months of 2014 and 2013, respectively. The declaration and payment of future dividends to holders of the Companys common stock will be at the discretion of the Companys board of directors and will depend upon many factors, including the Companys financial position, earnings, capital requirements of the Companys operating subsidiaries, legal requirements, regulatory constraints and other factors as the board of directors deems relevant. Dividends will be paid by the Company only if declared by its board of directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. On July 22, 2014, the Company announced that it declared a regular quarterly dividend of $0.55 per share, payable September 30, 2014, to shareholders of record on September 10, 2014.
Share Repurchase Authorization. The Companys board of directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Companys financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Companys desired ratings from independent rating agencies, funding of the Companys qualified pension plan, capital requirements of the Companys operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. During the three months and six months ended June 30, 2014, the Company repurchased 9.5 million and 17.3 million shares, respectively, under its share repurchase authorization, for a total cost of $875 million and $1.53 billion, respectively. The average cost per share repurchased was $92.67 and $88.27, respectively. At June 30, 2014, the Company had $3.23 billion of capacity remaining under the share repurchase authorization.
2014 Stock Incentive Plan. In February 2014, the Companys board of directors approved The Travelers Companies, Inc. 2014 Stock Incentive Plan (2014 Incentive Plan) to replace, effective with shareholder approval, the Amended and Restated 2004 Stock Incentive Plan (2004 Incentive Plan), which was scheduled to expire in July 2014. At the Companys 2014 Annual Meeting of Shareholders on May 27, 2014, the shareholders approved the 2014 Incentive Plan. Accordingly, the 2014 Incentive Plan became effective on that date and no further awards will be made under the 2004 Incentive Plan. The 2014 Incentive plan has substantially the same terms, other than the number of shares available, as the 2004 Incentive Plan
and is effective through February 5, 2024. The number of shares initially available for issuance under the 2014 Incentive Plan was 10,000,000 shares of common stock. Shares of common stock subject to an award granted under the 2014 Incentive Plan or the prior 2004 Incentive Plan that expire unexercised, are forfeited, terminated or canceled and that do not result in the issuance of common stock will be available for grant under the 2014 Incentive Plan.
Capital Structure. The following table summarizes the components of the Companys capital structure at June 30, 2014 and December 31, 2013.
(in millions) |
|
June 30, |
|
December 31, |
| ||
Debt: |
|
|
|
|
| ||
Short-term |
|
$ |
100 |
|
$ |
100 |
|
Long-term |
|
6,261 |
|
6,261 |
| ||
Net unamortized fair value adjustments and debt issuance costs |
|
(14 |
) |
(15 |
) | ||
Total debt |
|
6,347 |
|
6,346 |
| ||
|
|
|
|
|
| ||
Shareholders equity: |
|
|
|
|
| ||
Common stock and retained earnings, less treasury stock |
|
23,970 |
|
23,986 |
| ||
Accumulated other comprehensive income |
|
1,562 |
|
810 |
| ||
Total shareholders equity |
|
25,532 |
|
24,796 |
| ||
Total capitalization |
|
$ |
31,879 |
|
$ |
31,142 |
|
The following table provides a reconciliation of total capitalization excluding net unrealized gain on investments to total capitalization presented in the foregoing table.
(dollars in millions) |
|
June 30, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Total capitalization excluding net unrealized gain on investments |
|
$ |
29,866 |
|
$ |
29,820 |
|
Net unrealized gain on investments, net of taxes |
|
2,013 |
|
1,322 |
| ||
Total capitalization |
|
$ |
31,879 |
|
$ |
31,142 |
|
|
|
|
|
|
| ||
Debt-to-total capital ratio |
|
19.9 |
% |
20.4 |
% | ||
Debt-to-total capital ratio excluding net unrealized gain on investments |
|
21.3 |
% |
21.3 |
% |
The debt-to-total capital ratio excluding net unrealized gain on investments is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes. Net unrealized gains and losses on investments can be significantly impacted by both interest rate movements and other economic factors. Accordingly, in the opinion of the Companys management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Companys financial leverage position. The Companys ratio of debt-to-total capital (excluding after-tax net unrealized investment gains) was 21.3% at June 30, 2014, within the Companys target range of 15% to 25%.
RATINGS
Ratings are an important factor in assessing the Companys competitive position in the insurance industry. The Company receives ratings from the following major rating agencies: A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moodys Investors Service (Moodys) and Standard & Poors (S&P). The following rating agency actions were taken with respect to the Company since April 22, 2014, the date on which the Companys Form 10-Q for the quarter ended March 31, 2014 was filed with the Securities and Exchange Commission. For additional discussion of ratings, see the Ratings section of Part I Item 1 Business in the Companys Annual Report on Form 10-K for the year ended December 31, 2013.
· On May 23, 2014, A.M. Best upgraded the financial strength ratings to A++ from A+ and the issuer credit ratings to aa+ from aa of the property/casualty subsidiaries of The Travelers Companies, Inc. (TRV), as well as Travelers Casualty and Surety Company of America, Travelers Casualty and Surety Company of Europe, Ltd. and Travelers Insurance Company of Canada. Concurrently, A.M. Best upgraded the issuer credit ratings and senior debt ratings to a+ from a of TRV and its two wholly-owned downstream holding companies, Travelers Property Casualty Corp. and Travelers Insurance Group Holdings, Inc. The outlook for the above ratings has been revised to stable from positive. A.M. Best also affirmed the financial strength rating of A and issuer credit rating a+ of The Premier Insurance Company of Massachusetts, and the financial strength rating of A- and issuer credit rating of a- of First Floridian Auto and Home Insurance Company. The outlook for these ratings is stable.
· On May 23, 2014, A.M. Best assigned a financial strength rating of A and an issuer credit rating of a to The Dominion of Canada General Insurance Company, which the Company acquired in November 2013. The outlook assigned to all ratings is stable.
· On June 13, 2014, S&P affirmed all ratings of the Company. The outlook for all ratings is stable.
CRITICAL ACCOUNTING ESTIMATES
For a description of the Companys critical accounting estimates, refer to Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Estimates in the Companys Annual Report on Form 10-K for the year ended December 31, 2013. The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, investment valuation and impairments, and goodwill and other intangible assets impairments. Except as shown in the table below, there have been no material changes to the Companys critical accounting estimates since December 31, 2013.
Claims and Claim Adjustment Expense Reserves
The table below displays the Companys gross claims and claim adjustment expense reserves by product line. Additional liabilities may arise for amounts in excess of the current related reserves. In addition, the Companys estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Companys operating results in future periods. In particular, a portion of the Companys gross claims and claim adjustment expense reserves (totaling $2.88 billion at June 30, 2014) are for asbestos and environmental claims and related litigation. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Companys management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current reserves by an amount that could be material to the Companys future operating results. See the preceding discussion of Asbestos Claims and Litigation and Environmental Claims and Litigation.
Gross claims and claim adjustment expense reserves by product line were as follows:
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||||||||
(in millions) |
|
Case |
|
IBNR |
|
Total |
|
Case |
|
IBNR |
|
Total |
| ||||||
General liability |
|
$ |
5,281 |
|
$ |
8,438 |
|
$ |
13,719 |
|
$ |
5,355 |
|
$ |
8,604 |
|
$ |
13,959 |
|
Commercial property |
|
769 |
|
643 |
|
1,412 |
|
778 |
|
542 |
|
1,320 |
| ||||||
Commercial multi-peril |
|
1,923 |
|
1,796 |
|
3,719 |
|
1,879 |
|
1,707 |
|
3,586 |
| ||||||
Commercial automobile |
|
2,269 |
|
1,237 |
|
3,506 |
|
2,305 |
|
1,219 |
|
3,524 |
| ||||||
Workers compensation |
|
10,108 |
|
7,967 |
|
18,075 |
|
9,918 |
|
7,856 |
|
17,774 |
| ||||||
Fidelity and surety |
|
362 |
|
747 |
|
1,109 |
|
426 |
|
818 |
|
1,244 |
| ||||||
Personal automobile |
|
1,685 |
|
835 |
|
2,520 |
|
1,793 |
|
785 |
|
2,578 |
| ||||||
Homeowners and personalother |
|
628 |
|
599 |
|
1,227 |
|
635 |
|
551 |
|
1,186 |
| ||||||
International and other |
|
3,494 |
|
2,051 |
|
5,545 |
|
3,585 |
|
2,109 |
|
5,694 |
| ||||||
Property-casualty |
|
26,519 |
|
24,313 |
|
50,832 |
|
26,674 |
|
24,191 |
|
50,865 |
| ||||||
Accident and health |
|
24 |
|
|
|
24 |
|
30 |
|
|
|
30 |
| ||||||
Claims and claim adjustment expense reserves |
|
$ |
26,543 |
|
$ |
24,313 |
|
$ |
50,856 |
|
$ |
26,704 |
|
$ |
24,191 |
|
$ |
50,895 |
|
The $39 million decrease in gross claims and claim adjustment expense reserves since December 31, 2013 primarily reflected the impact of net favorable prior year reserve development and payments related to operations in runoff, including asbestos and environmental claims, partially offset by the impact of catastrophe losses incurred in the first six months of 2014.
Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the summary table above. Asbestos and environmental reserves are discussed separately; see Asbestos Claims and Litigation, Environmental Claims and Litigation and Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See note 1 of notes to the Companys unaudited consolidated financial statements contained in this quarterly report for a discussion of recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
This report contains, and management may make, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as may, will, should, likely, anticipates, expects, intends, plans, projects, believes, estimates and similar expressions are used to identify these forward-looking statements. Specifically, statements about the Companys outlook, share repurchase plans, expected margin improvement, potential returns, future pension plan contributions and the potential impact of investment markets and other economic conditions on the Companys investment portfolio and underwriting results, among others, are forward looking, and the Company may also make forward-looking statements about, among other things:
· its results of operations and financial condition (including, among other things, premium volume, premium rates, net and operating income, investment income and performance, loss costs, return on equity, and expected current returns and combined ratios);
· the sufficiency of the Companys asbestos and other reserves;
· the impact of emerging claims issues as well as other insurance and non-insurance litigation;
· the cost and availability of reinsurance coverage;
· catastrophe losses;
· the impact of investment, economic and underwriting market conditions; and
· strategic initiatives, including initiatives, such as in Personal Insurance, to improve profitability and competitiveness.
The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Companys control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.
Some of the factors that could cause actual results to differ include, but are not limited to, the following:
· catastrophe losses could materially and adversely affect the Companys results of operations, its financial position and/or liquidity, and could adversely impact the Companys ratings, the Companys ability to raise capital and the availability and cost of reinsurance;
· during or following a period of financial market disruption or economic downturn, the Companys business could be materially and adversely affected;
· if actual claims exceed the Companys claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, the Companys financial results could be materially and adversely affected;
· the Companys investment portfolio may suffer reduced returns or material realized or unrealized losses;
· the Companys business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
· the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;
· the effects of emerging claim and coverage issues on the Companys business are uncertain;
· the intense competition that the Company faces could harm its ability to maintain or increase its business volumes and profitability;
· the Company may not be able to collect all amounts due to it from reinsurers and reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all;
· the Company is exposed to credit risk in certain of its business and investment operations including reinsurance or structured settlements;
· within the United States, the Companys businesses are heavily regulated by the states in which it conducts business, including licensing and supervision, and changes in regulation may reduce the Companys profitability and limit its growth;
· changes in state or federal regulations or enforcement practices could impose significant burdens on the Company and otherwise adversely impact the Companys results;
· a downgrade in the Companys claims-paying and financial strength ratings could adversely impact the Companys business volumes, adversely impact the Companys ability to access the capital markets and increase the Companys borrowing costs;
· the inability of the Companys insurance subsidiaries to pay dividends to the Companys holding company in sufficient amounts would harm the Companys ability to meet its obligations, pay future shareholder dividends or make future share repurchases;
· disruptions to the Companys relationships with its independent agents and brokers could adversely affect the Company;
· the Companys efforts to develop new products, such as Quantum 2.0, or expand in targeted markets may not be successful and may create enhanced risks;
· the Company may be adversely affected if its pricing and capital models provide materially different indications than actual results;
· the Companys business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology;
· if the Company experiences difficulties with technology, data security and/or outsourcing relationships, the Companys ability to conduct its business could be negatively impacted;
· the Company is subject to a number of risks associated with its business outside the United States;
· new regulations outside of the United States, including in the European Union, could adversely impact the Companys results of operations and limit its growth;
· loss of or significant restriction on the use of particular types of underwriting criteria, such as credit scoring, in the pricing and underwriting of the Companys products could reduce the Companys future profitability;
· acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;
· the Company could be adversely affected if its controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;
· the Companys businesses may be adversely affected if it is unable to hire and retain qualified employees;
· intellectual property is important to the Companys business, and the Company may be unable to protect and enforce its own intellectual property or the Company may be subject to claims for infringing on the intellectual property of others;
· changes to existing accounting standards may adversely impact the Companys reported results;
· changes in U.S. tax laws or in the tax laws of other jurisdictions in which the Company operates could adversely impact the Company; and
· the Companys repurchase plans depend on a variety of factors, including the Companys financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Companys desired ratings from independent rating agencies, funding of the Companys qualified pension plan, capital requirements of the Companys operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.
The Companys forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the caption Risk Factors in the Companys most recent annual report on Form 10-K filed with the Securities and Exchange Commission and Managements Discussion and Analysis of Financial Condition and Results of Operations herein and in the Companys most recent annual report on Form 10-K.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
From time to time, the Company may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material company information. Financial and other important information regarding the Company is routinely accessible through and posted on the Companys website at http://investor.travelers.com, its Facebook page at http://www.facebook.com/travelers and its Twitter account (@TRV_Insurance) at http://twitter.com/TRV_Insurance. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the Email Alert Service section at http://investor.travelers.com.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the Companys disclosures about market risk, please see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of the Companys 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to the Companys disclosures about market risk in Part II, Item 7A of the Companys 2013 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Companys reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as of June 30, 2014. Consistent with guidance issued by the Securities and Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from managements evaluation of disclosure controls and procedures, management is excluding an assessment of such internal controls of Dominion from its evaluation of the effectiveness of the Companys disclosure controls and procedures. The Company acquired all of the issued and outstanding shares of Dominion on November 1, 2013. Dominion represented less than 4% of the Companys consolidated total assets,
less than 5% of the Companys consolidated total revenues and less than 3% of the Companys consolidated net income as of and for the six months ended June 30, 2014. Based upon that evaluation and subject to the foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2014, the design and operation of the Companys disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
In addition, there was no change in the Companys internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. As mentioned above, the Company acquired Dominion on November 1, 2013. The Company is in the process of reviewing the internal control structure of Dominion and, if necessary, will make appropriate changes as it integrates Dominion into the Companys overall internal control over financial reporting process.
The information required with respect to this item can be found under Contingencies in note 11 of notes to the Companys unaudited consolidated financial statements contained in this quarterly report and is incorporated by reference into this Item 1.
For a discussion of the Companys potential risks or uncertainties, please see Risk Factors in Part I, Item 1A of the Companys 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In addition, please see Managements Discussion and Analysis of Financial Condition and Results of Operations Outlook and Critical Accounting Estimates herein and in the 2013 Form 10-K. There have been no material changes to the risk factors disclosed in Part I, Item 1A of the Companys 2013 Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated.
ISSUER PURCHASES OF EQUITY SECURITIES
Period Beginning |
|
Period Ending |
|
Total number of |
|
Average price paid |
|
Total number of |
|
Approximate |
| ||
April 1, 2014 |
|
April 30, 2014 |
|
1,262,274 |
|
$ |
89.46 |
|
1,261,613 |
|
$ |
3,996 |
|
May 1, 2014 |
|
May 31, 2014 |
|
5,156,639 |
|
92.21 |
|
5,143,794 |
|
3,522 |
| ||
June 1, 2014 |
|
June 30, 2014 |
|
3,041,261 |
|
94.77 |
|
3,038,912 |
|
3,234 |
| ||
Total |
|
|
|
9,460,174 |
|
92.67 |
|
9,444,319 |
|
3,234 |
| ||
The Companys board of directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Companys financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Companys desired ratings from independent rating agencies, funding of the Companys qualified pension plan, capital requirements of the Companys operating subsidiaries, legal requirements, regulatory constraints, other investment
opportunities (including mergers and acquisitions and related financings), market conditions and other factors.
The Company acquired 15,855 shares for a total cost of approximately $1 million during the three months ended June 30, 2014 that were not part of the publicly announced share repurchase authorization. These shares consisted of shares retained to cover payroll withholding taxes in connection with the vesting of restricted stock awards and shares used by employees to cover the exercise price of certain stock options that were exercised.
Executive Ownership and Sales. All of the Companys executive officers hold equity in the Company in excess of the required level under the Companys executive stock ownership policy. For a summary of this policy as currently in effect, see Compensation Discussion and AnalysisStock Ownership Guidelines in the Companys proxy statement filed with the Securities and Exchange Commission on April 11, 2014. From time to time, some of the Companys executives may determine that it is advisable to diversify their investments for personal financial planning reasons, or may seek liquidity for other reasons, and may sell shares of common stock of the Company in the open market, in private transactions or to the Company. To effect such sales, some of the Companys executives have entered into, and may in the future enter into, trading plans designed to comply with the Companys Securities Trading Policy and the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934. The trading plans will not reduce any of the executives ownership of the Companys shares below the applicable executive stock ownership guidelines. The Company does not undertake any obligation to report Rule 10b5-1 plans that may be adopted by any employee or director of the Company in the future, or to report any modifications or termination of any publicly announced plan.
As of the date of this report, Jay S. Fishman, Chairman and Chief Executive Officer, and Brian W. MacLean, President and Chief Operating Officer, were the only named executive officers (i.e., an executive officer named in the compensation disclosures in the Companys proxy statement) that have entered into Rule 10b5-1 trading plans that remain in effect. The trading plans extend from approximately four to five months from the date of this report. Under the Companys stock ownership guidelines, Mr. Fishman has a target ownership level established as the lesser of 150,000 shares or the equivalent value of 500% of base salary, and Mr. MacLean has a target ownership level established as the lesser of 30,000 shares or the equivalent value of 300% of base salary (as such amount is calculated for purposes of the stock ownership guidelines). See Compensation Discussion and Analysis Stock Ownership Guidelines in the Companys proxy statement filed with the SEC on April 11, 2014.
Glossary of Selected Insurance Terms. The following definitions have been updated from those previously provided in the Companys Annual Report on Form 10-K for the year ended December 31, 2013 to better align the definition of deferred acquisition costs with the Companys notes to financial statements and to clarify that the ratios described below are calculated as prescribed by Statutory Accounting Practices (SAP), the most comparable measure, as adjusted to be consistent with revenue and expense recognition as presented in the Companys Reports on Form 10-K and Form 10-Q.
Deferred acquisition costs (DAC) |
|
DAC consists of incremental direct costs of acquired and renewal insurance contracts, consisting of commissions (other than contingent commissions) and premium-related taxes that are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP). |
Combined ratio |
|
For Statutory Accounting Practices (SAP), the combined ratio is the sum of the SAP loss and LAE ratio and the SAP underwriting expense ratio as defined in the statutory financial statements required by insurance regulators. The combined ratio as used in this report is the equivalent of, and is calculated in the same manner as, the SAP combined ratio except that the SAP underwriting expense ratio is based on net written premium and the underwriting expense ratio as used in this report is based on net earned premiums.
The combined ratio is an indicator of the Companys underwriting discipline, efficiency in acquiring and servicing its business and overall underwriting profitability. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Other companies method of computing a similarly titled measure may not be comparable to the Companys method of computing this ratio. |
|
|
|
Loss and LAE ratio |
|
For SAP, the loss and LAE ratio is the ratio of incurred losses and loss adjustment expenses less certain administrative services fee income to net earned premiums as defined in the statutory financial statements required by insurance regulators. The loss and LAE ratio as used in this report is calculated in the same manner as the SAP ratio.
The loss and LAE ratio is an indicator of the Companys underwriting discipline and underwriting profitability.
Other companies method of computing a similarly titled measure may not be comparable to the Companys method of computing this ratio. |
|
|
|
Underwriting expense ratio |
|
For SAP, the underwriting expense ratio is the ratio of underwriting expenses incurred (including commissions paid), less certain administrative services fee income and billing and policy fees, to net written premiums as defined in the statutory financial statements required by insurance regulators. The underwriting expense ratio as used in this report is the ratio of underwriting expenses (including the amortization of deferred acquisition costs), less certain administrative services fee income and billing and policy fees, to net earned premiums.
The underwriting expense ratio is an indicator of the Companys efficiency in acquiring and servicing its business.
Other companies method of computing a similarly titled measure may not be comparable to the Companys method of computing this ratio. |
|
|
|
Combined ratio excluding incremental impact of direct to consumer initiative |
|
The combined ratio excluding incremental impact of direct to consumer initiative is the combined ratio adjusted to exclude the direct, variable impact of the Companys direct-to-consumer initiative in the Personal Insurance segment. |
Underlying combined ratio |
|
The underlying combined ratio is the sum of the underlying loss and LAE ratio and the underlying underwriting expense ratio. The underlying combined ratio is an indicator of the Companys underwriting discipline and underwriting profitability for the current accident year. |
|
|
|
Underlying loss and LAE ratio |
|
The underlying loss and LAE ratio is the loss and LAE ratio, adjusted to exclude the impact of catastrophe losses and prior year reserve development. The underlying loss and LAE ratio is an indicator of the Companys underwriting discipline and underwriting profitability for the current accident year. |
|
|
|
Underlying underwriting expense ratio |
|
The underlying underwriting expense ratio is the underwriting expense ratio adjusted to exclude the impact of catastrophe losses. |
See Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, The Travelers Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
THE TRAVELERS COMPANIES, INC. |
|
|
(Registrant) |
|
|
|
Date: July 22, 2014 |
By |
/S/ MATTHEW S. FURMAN |
|
|
Matthew S. Furman |
|
|
Senior Vice President |
|
|
(Authorized Signatory) |
|
|
|
Date: July 22, 2014 |
By |
/S/ DOUGLAS K. RUSSELL |
|
|
Douglas K. Russell |
|
|
Senior Vice President and Corporate Controller |
|
|
(Principal Accounting Officer) |
Exhibit Number |
|
Description of Exhibit |
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation of The Travelers Companies, Inc. (the Company), as amended and restated May 23, 2013, were filed as Exhibit 3.1 to the Companys current report on Form 8-K filed on May 24, 2013, and are incorporated herein by reference. |
|
|
|
3.2 |
|
Amended and Restated Bylaws of the Company, effective as of February 18, 2009, were filed as Exhibit 3.2 to the Companys annual report on Form 10-K for the fiscal year ended December 31, 2008, and are incorporated herein by reference. |
|
|
|
10.1 |
|
The Travelers Companies, Inc. 2014 Stock Incentive Plan was filed as Exhibit 4.3 to the Companys Registration Statement on Form S-8 dated May 27, 2014 and is incorporated herein by reference. |
|
|
|
10.2 |
|
Current Director Compensation Program, effective as of May 28, 2014. |
|
|
|
12.1 |
|
Statement regarding the computation of the ratio of earnings to fixed charges. |
|
|
|
31.1 |
|
Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
|
Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
|
Certification of Jay S. Fishman, Chairman and Chief Executive Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
|
Certification of Jay S. Benet, Vice Chairman and Chief Financial Officer of the Company, as required by Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.1 |
|
The following financial information from The Travelers Companies, Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL: (i) Consolidated Statement of Income for the three months and six months ended June 30, 2014 and 2013; (ii) Consolidated Statement of Comprehensive Income for the three months and six months ended June 30, 2014 and 2013; (iii) Consolidated Balance Sheet at June 30, 2014 and December 31, 2013; (iv) Consolidated Statement of Changes in Shareholders Equity for the six months ended June 30, 2014 and 2013; (v) Consolidated Statement of Cash Flows for the six months ended June 30, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements. |
Filed herewith.
The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. Therefore, the Company is not filing any instruments evidencing long-term debt. However, the Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request.
Copies of any of the exhibits referred to above will be furnished to security holders who make written request therefor to The Travelers Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs at the date they were made or at any other time.
Exhibit 10.2
CURRENT DIRECTOR COMPENSATION PROGRAM
As of May 28, 2014
1. Annual Retainer: $125,000 (effective on the date of the Annual Meeting of Shareholders in 2014) Paid in quarterly installments in arrears at the end of each quarter in cash or, if the director so elects, in deferred stock units to be distributed at a later date designated by the director.
2. Annual Deferred Stock Award: $165,000 (effective with respect to awards granted after December 31, 2014) Awarded in February to incumbent directors who are nominated for re-election at the next shareholders meeting in the form of deferred stock units. Deferred stock units vest one day prior to the date of the annual shareholder meeting occurring in the year following the year of the date of grant. Vested deferred stock units are distributed either in a lump sum six months after termination of service as a director or, if the director so elects, in annual installments beginning at least six months following termination of service as a director.
3. Committee Chair Fees: Currently, the annual amount of committee chair fees, which are paid quarterly in arrears, are as follows: Audit - $25,000, Compensation - $20,000, Nominating and Governance - $20,000, Investment and Capital Markets - $20,000 and Risk - $20,000.
4. Lead Director: Effective November 2, 2006, the Board established the position of Lead Director of the Board and agreed that the Lead Director will be paid $25,000 per year (payable in arrears in quarterly installments as of the last business day of each quarter).
Exhibit 12.1
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
(in millions, except ratios) |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
$ |
901 |
|
$ |
1,177 |
|
$ |
2,371 |
|
$ |
2,397 |
|
Interest |
|
92 |
|
86 |
|
184 |
|
178 |
| ||||
Portion of rentals deemed to be interest |
|
17 |
|
16 |
|
34 |
|
32 |
| ||||
Income available for fixed charges |
|
$ |
1,010 |
|
$ |
1,279 |
|
$ |
2,589 |
|
$ |
2,607 |
|
|
|
|
|
|
|
|
|
|
| ||||
Fixed charges: |
|
|
|
|
|
|
|
|
| ||||
Interest |
|
$ |
92 |
|
$ |
86 |
|
$ |
184 |
|
$ |
178 |
|
Portion of rentals deemed to be interest |
|
17 |
|
16 |
|
34 |
|
32 |
| ||||
Total fixed charges |
|
$ |
109 |
|
$ |
102 |
|
$ |
218 |
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
| ||||
Ratio of earnings to fixed charges |
|
9.14 |
|
12.52 |
|
11.81 |
|
12.39 |
|
The ratio of earnings to fixed charges is computed by dividing income available for fixed charges by the fixed charges. For purposes of this ratio, fixed charges consist of that portion of rentals deemed representative of the appropriate interest factor.
Exhibit 31.1
CERTIFICATION
I, Jay S. Fishman, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 of The Travelers Companies, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter (the Companys fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and
5. The Companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
Date: |
July 22, 2014 |
|
By: |
/S/ JAY S. FISHMAN |
|
|
|
Jay S. Fishman | |
|
|
|
Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Jay S. Benet, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 of The Travelers Companies, Inc. (the Company);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Companys other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the Companys internal control over financial reporting that occurred during the Companys most recent fiscal quarter (the Companys fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and
5. The Companys other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors:
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
Date: |
July 22, 2014 |
|
By: |
/S/ JAY S. BENET |
|
|
|
Jay S. Benet | |
|
|
|
Vice Chairman and Chief Financial Officer |
Exhibit 32.1
THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the Exchange Act) and 18 U.S.C. Section 1350, the undersigned officer of The Travelers Companies, Inc. (the Company), hereby certifies that the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: |
July 22, 2014 |
|
By: |
/S/ JAY S. FISHMAN |
|
|
|
Name: Jay S. Fishman | |
|
|
|
Title: Chairman and Chief Executive Officer |
Exhibit 32.2
THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 (the Exchange Act) and 18 U.S.C. Section 1350, the undersigned officer of The Travelers Companies, Inc. (the Company), hereby certifies that the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: |
July 22, 2014 |
|
By: |
/S/ JAY S. BENET |
|
|
|
Name: Jay S. Benet | |
|
|
|
Title: Vice Chairman and Chief Financial Officer |
Fair Value Measurements (details) (USD $)
In Millions, unless otherwise specified |
Jun. 30, 2014
|
Dec. 31, 2013
|
---|---|---|
Fair Value Measurements disclosure | ||
Percent of fixed maturities for which a pricing service estimates fair value | 98.00% | 98.00% |
Fair value of the fixed maturities for which the Company used an internal pricing matrix | $ 134 | $ 94 |
Fair value of the fixed maturities for which the Company received a broker quote | 130 | 161 |
Convertible bonds held containing embedded conversion options that are valued separately from the host bond contract and disclosed in Level 2 | $ 9 | $ 8 |
Percent of short-term securities for which a pricing service estimates fair value | 97.00% | 97.00% |
Percent of debt, including commercial paper, for which a pricing service estimates fair value | 100.00% | 100.00% |
Contingencies, Commitments and Guarantees (details) - Gain Contingencies (United States Fidelity & Guaranty Company v. American Re-Insurance Company, et al. [Member], USD $)
In Millions, unless otherwise specified |
0 Months Ended | 44 Months Ended | ||
---|---|---|---|---|
Oct. 25, 2010
item
|
Jun. 30, 2014
|
Nov. 30, 2013
item
|
Feb. 07, 2013
item
|
|
United States Fidelity & Guaranty Company v. American Re-Insurance Company, et al. [Member]
|
||||
Gain Contingencies | ||||
Number of other reinsurers beside American Re against which judgment was entered in a reinsurance dispute | 3 | |||
Total settlement amount | $ 420 | $ 477 | ||
Interest amount included in settlement award | 169 | 239 | ||
Initial settement amount | $ 251 | $ 238 | ||
Interest rate accruing on judgment not yet paid | 9.00% | 9.00% | ||
Number of discrete issues modified in part by the summary judgment in reinsurance dispute | 2 | |||
Number of reinsurers with whom the Company has reached a settlement agreeement | 1 |
Common Share Repurchases (details) (Board of Directors Approved Repurchase Authorizations [Member], USD $)
Share data in Millions, except Per Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended |
---|---|---|
Jun. 30, 2014
|
Jun. 30, 2014
|
|
Board of Directors Approved Repurchase Authorizations [Member]
|
||
Repurchase activity | ||
Number of shares repurchased (in shares) | 9.5 | 17.3 |
Cost of shares repurchased | $ 875,000,000 | $ 1,530,000,000 |
Average cost per share repurchased | $ 92.67 | $ 88.27 |
Remaining capacity under share repurchase authorization | $ 3,230,000,000 | $ 3,230,000,000 |
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