TRAVELERS COMPANIES, INC. - Quarter Report: 2015 March (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2015

 

or

 

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

 

For the transition period from              to             

 

 

Commission file number: 001-10898

 

 

The Travelers Companies, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

485 Lexington Avenue

New York, NY 10017

(Address of principal executive offices) (Zip Code)

 

(917) 778-6000

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

Large accelerated filer                        x		Accelerated filer                                                                                                        o
Non-accelerated filer                               o		Smaller reporting company                                             o
(Do not check if a smaller reporting company)

 

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

 

The number of shares of the Registrant’s Common Stock, without par value, outstanding at April 17, 2015 was 318,698,313.

 

 

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The Travelers Companies, Inc.

 

Quarterly Report on Form 10-Q

 

For Quarterly Period Ended March 31, 2015

 

 

TABLE OF CONTENTS

 

		Page
	Part I — Financial Information
Item 1.	Financial Statements:
	Consolidated Statement of Income (Unaudited) — Three Months Ended March 31, 2015 and 2014	3
	Consolidated Statement of Comprehensive Income (Unaudited) — Three Months Ended March 31, 2015 and 2014	4
	Consolidated Balance Sheet — March 31, 2015 (Unaudited) and December 31, 2014	5
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three Months Ended March 31, 2015 and 2014	6
	Consolidated Statement of Cash Flows (Unaudited) — Three Months Ended March 31, 2015 and 2014	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	61
	Part II — Other Information
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 5.	Other Information	62
Item 6.	Exhibits	63
	SIGNATURES	63
	EXHIBIT INDEX	64

 

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PART 1 — FINANCIAL INFORMATION

 

Item 1.  FINANCIAL STATEMENTS

 

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(in millions, except per share amounts)

 

For the three months ended March 31,		2015			2014
Revenues
Premiums		$	5,888		$	5,823
Net investment income		592			736
Fee income		111			107
Net realized investment gains (1)		10			1
Other revenues		25			41
Total revenues		6,626			6,708
Claims and expenses
Claims and claim adjustment expenses		3,431			3,315
Amortization of deferred acquisition costs		963			950
General and administrative expenses		992			881
Interest expense		92			92
Total claims and expenses		5,478			5,238
Income before income taxes		1,148			1,470
Income tax expense		315			418
Net income		$	833		$	1,052
Net income per share
Basic		$	2.58		$	2.98
Diluted		$	2.55		$	2.95
Weighted average number of common shares outstanding
Basic		320.8			350.9
Diluted		324.5			354.6

 

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

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)

(in millions)

 

 

For the three months ended March 31,		2015			2014
Net income		$	833		$	1,052
Other comprehensive income (loss):
Changes in net unrealized gains on investment securities:
Having no credit losses recognized in the consolidated statement of income		169			537
Having credit losses recognized in the consolidated statement of income		(5		)	2
Net changes in benefit plan assets and obligations		24			15
Net changes in unrealized foreign currency translation		(274		)	(43		)
Other comprehensive income (loss) before income taxes		(86		)	511
Income tax expense		25			194
Other comprehensive income (loss), net of taxes		(111		)	317
Comprehensive income		$	722		$	1,369

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

 

		March 31, 2015			December  31,  2014
		(Unaudited)
Assets
Fixed maturities, available for sale, at fair value (amortized cost $59,916 and $60,801)		$	62,769		$	63,474
Equity securities, available for sale, at fair value (cost $563 and $579)		866			899
Real estate investments		929			938
Short-term securities		4,490			4,364
Other investments		3,565			3,586
Total investments		72,619			73,261
Cash		308			374
Investment income accrued		628			685
Premiums receivable		6,528			6,298
Reinsurance recoverables		9,142			9,260
Ceded unearned premiums		830			678
Deferred acquisition costs		1,847			1,835
Deferred taxes		—			33
Contractholder receivables		4,396			4,362
Goodwill		3,590			3,611
Other intangible assets		292			304
Other assets		2,511			2,377
Total assets		$	102,691		$	103,078
Liabilities
Claims and claim adjustment expense reserves		$	48,994		$	49,850
Unearned premium reserves		11,954			11,839
Contractholder payables		4,396			4,362
Payables for reinsurance premiums		485			336
Deferred taxes		126			—
Debt		6,349			6,349
Other liabilities		5,540			5,506
Total liabilities		77,844			78,242
Shareholders’ equity
Common stock (1,750.0 shares authorized; 318.7 and 322.2 shares issued and outstanding)		21,982			21,843
Retained earnings		27,906			27,251
Accumulated other comprehensive income		769			880
Treasury stock, at cost (443.6 and 437.3 shares)		(25,810		)	(25,138		)
Total shareholders’ equity		24,847			24,836
Total liabilities and shareholders’ equity		$	102,691		$	103,078

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in millions)

 

For the three months ended March 31,		2015			2014
Common stock
Balance, beginning of year		$	21,843		$	21,500
Employee share-based compensation		66			45
Compensation amortization under share-based plans and other changes		73			58
Balance, end of period		21,982			21,603
Retained earnings
Balance, beginning of year		27,251			24,291
Net income		833			1,052
Dividends		(178		)	(177		)
Other		—			1
Balance, end of period		27,906			25,167
Accumulated other comprehensive income, net of tax
Balance, beginning of year		880			810
Other comprehensive income (loss)		(111		)	317
Balance, end of period		769			1,127
Treasury stock (at cost)
Balance, beginning of year		(25,138		)	(21,805		)
Treasury stock acquired — share repurchase authorization		(600		)	(650		)
Net shares acquired related to employee share-based compensation plans		(72		)	(55		)
Balance, end of period		(25,810		)	(22,510		)
Total shareholders’ equity		$	24,847		$	25,387
Common shares outstanding
Balance, beginning of year		322.2			353.5
Treasury stock acquired — share repurchase authorization		(5.6		)	(7.8		)
Net shares issued under employee share-based compensation plans		2.1			1.8
Balance, end of period		318.7			347.5

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

(in millions)

 

For the three months ended March 31,		2015			2014
Cash flows from operating activities
Net income		$	833		$	1,052
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains		(10		)	(1		)
Depreciation and amortization		225			227
Deferred federal income tax expense		133			153
Amortization of deferred acquisition costs		963			950
Equity in income from other investments		(43		)	(139		)
Premiums receivable		(258		)	(189		)
Reinsurance recoverables		69			106
Deferred acquisition costs		(987		)	(986		)
Claims and claim adjustment expense reserves		(561		)	(209		)
Unearned premium reserves		185			94
Other		(350		)	(355		)
Net cash provided by operating activities		199			703
Cash flows from investing activities
Proceeds from maturities of fixed maturities		2,830			2,312
Proceeds from sales of investments:
Fixed maturities		906			406
Equity securities		11			36
Real estate investments		7			1
Other investments		146			167
Purchases of investments:
Fixed maturities		(3,325		)	(2,715		)
Equity securities		(8		)	(18		)
Real estate investments		(6		)	(9		)
Other investments		(168		)	(113		)
Net purchases of short-term securities		(134		)	(160		)
Securities transactions in course of settlement		305			240
Acquisition, net of cash acquired		—			(12		)
Other		(90		)	(60		)
Net cash provided by investing activities		474			75
Cash flows from financing activities
Treasury stock acquired — share repurchase authorization		(600		)	(650		)
Treasury stock acquired — net employee share-based compensation		(71		)	(54		)
Dividends paid to shareholders		(177		)	(176		)
Issuance of common stock — employee share options		90			57
Excess tax benefits from share-based payment arrangements		27			13
Net cash used in financing activities		(731		)	(810		)
Effect of exchange rate changes on cash		(8		)	(2		)
Net decrease in cash		(66		)	(34		)
Cash at beginning of year		374			294
Cash at end of period		$	308		$	260
Supplemental disclosure of cash flow information
Income taxes paid		$	126		$	93
Interest paid		$	34		$	34

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

Basis of Presentation

 

The interim consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited.  In the opinion of the Company’s management, all adjustments necessary for a fair presentation have been reflected.  Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted.  All material intercompany transactions and balances have been eliminated.  The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the Company’s 2014 Annual Report).

 

The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period.  Actual results could differ from those estimates.  Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation, including reclassifications related to the realignment of the Company’s reportable business segments in July 2014 described in the Company’s 2014 Annual Report.

 

Adoption of Accounting Standards Updates

 

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

 

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

 

Accounting Standards Not Yet Adopted

 

Amendments to the Consolidation Analysis

 

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

 

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

 

Simplifying the Presentation of Debt Issuance Costs

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

1.                       BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

 

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

 

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

 

Additional Accounting Standards Not Yet Adopted

 

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

 

Nature of Operations

 

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

 

2.             SEGMENT INFORMATION

 

The following tables summarize the components of the Company’s revenues, operating income and total assets by reportable business segments:

 

(for the three months  ended March 31,  in millions)		Business and International Insurance			Bond & Specialty Insurance			Personal Insurance			Total Reportable Segments
2015
Premiums		$	3,620		$	504		$	1,764		$	5,888
Net investment income		454			56			82			592
Fee income		111			—			—			111
Other revenues		8			5			12			25
Total operating revenues (1)		$	4,193		$	565		$	1,858		$	6,616
Operating income (1)		$	515		$	124		$	252		$	891
2014
Premiums		$	3,558		$	503		$	1,762		$	5,823
Net investment income		570			66			100			736
Fee income		107			—			—			107
Other revenues		12			4			26			42
Total operating revenues (1)		$	4,247		$	573		$	1,888		$	6,708
Operating income (1)		$	694		$	154		$	268		$	1,116

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

Business Segment Reconciliations

 

		Three Months Ended March 31,
(in millions)		2015			2014
Revenue reconciliation
Earned premiums
Business and International Insurance:
Domestic:
Workers’ compensation		$	962		$	908
Commercial automobile		469			468
Commercial property		441			428
General liability		472			447
Commercial multi-peril		775			755
Other		10			10
Total Domestic		3,129			3,016
International		491			542
Total Business and International Insurance		3,620			3,558
Bond & Specialty Insurance:
Fidelity and surety		225			222
General liability		236			237
Other		43			44
Total Bond & Specialty Insurance		504			503
Personal Insurance:
Automobile		836			815
Homeowners and Other		928			947
Total Personal Insurance		1,764			1,762
Total earned premiums		5,888			5,823
Net investment income		592			736
Fee income		111			107
Other revenues		25			42
Total operating revenues for reportable segments		6,616			6,708
Other revenues		—			(1		)
Net realized investment gains		10			1
Total consolidated revenues		$	6,626		$	6,708
Income reconciliation, net of tax
Total operating income for reportable segments		$	891		$	1,116
Interest Expense and Other (1)		(64		)	(64		)
Total operating income		827			1,052
Net realized investment gains		6			—
Total consolidated net income		$	833		$	1,052

 

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

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

 

2.                       SEGMENT INFORMATION, Continued

 

(in millions)		March 31, 2015			December 31, 2014
Asset reconciliation:
Business and International Insurance		$	81,892		$	82,309
Bond & Specialty Insurance		7,637			7,525
Personal Insurance		12,859			12,798
Total assets for reportable segments		102,388			102,632
Other assets (1)		303			446
Total consolidated assets		$	102,691		$	103,078

 

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

 

3.                       INVESTMENTS

 

Fixed Maturities

 

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

 

		Amortized			Gross Unrealized						Fair
(at March 31, 2015, in millions)		Cost			Gains			Losses			Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities		$	2,036		$	45		$	2		$	2,079
Obligations of states, municipalities and political subdivisions:
Pre-refunded		6,893			324			—			7,217
All other		24,591			1,276			24			25,843
Total obligations of states, municipalities and political subdivisions		31,484			1,600			24			33,060
Debt securities issued by foreign governments		2,117			65			—			2,182
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities		1,986			170			3			2,153
All other corporate bonds		22,180			1,036			45			23,171
Redeemable preferred stock		113			11			—			124
Total		$	59,916		$	2,927		$	74		$	62,769

 

		Amortized			Gross Unrealized						Fair
(at December 31, 2014, in millions)		Cost			Gains			Losses			Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities		$	2,022		$	36		$	5		$	2,053
Obligations of states, municipalities and political subdivisions:
Pre-refunded		7,229			332			—			7,561
All other		24,666			1,356			10			26,012
Total obligations of states, municipalities and political subdivisions		31,895			1,688			10			33,573
Debt securities issued by foreign governments		2,320			48			—			2,368
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities		2,052			165			4			2,213
All other corporate bonds		22,390			844			99			23,135
Redeemable preferred stock		122			10			—			132
Total		$	60,801		$	2,791		$	118		$	63,474

 

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