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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
_________________________________________________________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
___________________________________________________________________
 
Commission file number: 001-10898
___________________________________________________________________
The Travelers Companies, Inc.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________________
Minnesota
 
41-0518860
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
485 Lexington Avenue
New York, NY 10017
(Address of principal executive offices) (Zip Code)
 (917) 778-6000
(Registrant’s telephone number, including area code)
_________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, without par value
 
TRV
 
New York Stock Exchange
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 ý    No o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).         
Yes ý    No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
☐
 
Emerging growth company
☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐    No ý 
The number of shares of the Registrant’s Common Stock, without par value, outstanding at July 19, 2019 was 260,385,722.

Table of Contents

The Travelers Companies, Inc.
 
Quarterly Report on Form 10-Q
 
For Quarterly Period Ended June 30, 2019
_________________________________________________________
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statement of Income (Unaudited) — Three Months and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Consolidated Statement of Comprehensive Income (Loss) (Unaudited) — Three Months and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Consolidated Balance Sheet — June 30, 2019 (Unaudited) and December 31, 2018
 
 
 
 
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three Months and Six Months Ended June 30, 2019 and 2018
 
 
 
 
Consolidated Statement of Cash Flows (Unaudited) — Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 


2
Table of Contents

PART 1 — FINANCIAL INFORMATION
 
Item 1.  FINANCIAL STATEMENTS
 
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Premiums
 
$
6,988

 
$
6,695

 
$
13,843

 
$
13,232

Net investment income
 
648

 
595

 
1,230

 
1,198

Fee income
 
116

 
112

 
225

 
215

Net realized investment gains (1)
 
25

 
36

 
78

 
25

Other revenues
 
57

 
39

 
129

 
93

 
 
 
 
 
 
 
 
 
Total revenues
 
7,834

 
7,477

 
15,505

 
14,763

 
 
 
 
 
 
 
 
 
Claims and expenses
 
 
 
 
 
 
 
 
Claims and claim adjustment expenses
 
4,821

 
4,562

 
9,263

 
8,858

Amortization of deferred acquisition costs
 
1,134

 
1,081

 
2,251

 
2,142

General and administrative expenses
 
1,125

 
1,113

 
2,182

 
2,175

Interest expense
 
89

 
90

 
177

 
179

Total claims and expenses
 
7,169

 
6,846

 
13,873

 
13,354

 
 
 
 
 
 
 
 
 
Income before income taxes
 
665

 
631

 
1,632

 
1,409

Income tax expense
 
108

 
107

 
279

 
216

Net income
 
$
557

 
$
524

 
$
1,353

 
$
1,193

 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
 
Basic
 
$
2.11

 
$
1.93

 
$
5.12

 
$
4.39

Diluted
 
$
2.10

 
$
1.92

 
$
5.08

 
$
4.35

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
Basic
 
261.3

 
268.7

 
262.1

 
269.8

Diluted
 
263.7

 
271.1

 
264.2

 
272.5

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$
0.82

 
$
0.77

 
$
1.59

 
$
1.49


________________________________________________________
(1)
Total other-than-temporary impairment (OTTI) gains (losses) were $(1) million for each of the three months ended June 30, 2019 and 2018, and $(2) million and $(1) million for the six months ended June 30, 2019 and June 30, 2018, respectively.  Of total OTTI, credit losses of $(1) million for each of the three months ended June 30, 2019 and 2018, and $(2) million and $(1) million for the six months ended June 30, 2019 and June 30, 2018, respectively, were recognized in net realized investment gains.  In addition, unrealized gains (losses) from other changes in total OTTI of $0 million for each of the three months and six months ended June 30, 2019 and 2018 were recognized in other comprehensive income (loss) as part of changes in net unrealized gains (losses) on investment securities having credit losses recognized in the consolidated statement of income.
 
The accompanying notes are an integral part of the consolidated financial statements.

3
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income
 
$
557

 
$
524

 
$
1,353

 
$
1,193

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Changes in net unrealized gains (losses) on investment securities:
 
 
 
 
 
 
 
 
Having no credit losses recognized in the consolidated statement of income
 
1,108

 
(298
)
 
2,524

 
(1,501
)
Having credit losses recognized in the consolidated statement of income
 
(4
)
 
(12
)
 
1

 
(14
)
Net changes in benefit plan assets and obligations
 
14

 
21

 
26

 
43

Net changes in unrealized foreign currency translation
 
5

 
(158
)
 
55

 
(152
)
Other comprehensive income (loss) before income taxes
 
1,123

 
(447
)
 
2,606

 
(1,624
)
Income tax expense (benefit)
 
235

 
(81
)
 
541

 
(325
)
Other comprehensive income (loss), net of taxes
 
888

 
(366
)
 
2,065

 
(1,299
)
Comprehensive income (loss)
 
$
1,445

 
$
158

 
$
3,418

 
$
(106
)
 






























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


4
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
 
 
 
June 30,
2019
 
December 31,
2018
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost $64,784 and $63,601)
 
$
67,172

 
$
63,464

Equity securities, at fair value  (cost $373 and $382)
 
406

 
368

Real estate investments
 
965

 
904

Short-term securities
 
3,487

 
3,985

Other investments
 
3,466

 
3,557

Total investments
 
75,496

 
72,278

Cash
 
416

 
373

Investment income accrued
 
615

 
624

Premiums receivable
 
8,297

 
7,506

Reinsurance recoverables
 
8,234

 
8,370

Ceded unearned premiums
 
864

 
578

Deferred acquisition costs
 
2,281

 
2,120

Deferred taxes
 
—

 
445

Contractholder receivables
 
4,776

 
4,785

Goodwill
 
3,943

 
3,937

Other intangible assets
 
335

 
345

Other assets
 
3,315

 
2,872

Total assets
 
$
108,572

 
$
104,233

 
 
 
 
 
Liabilities
 
 

 
 

Claims and claim adjustment expense reserves
 
$
51,073

 
$
50,668

Unearned premium reserves
 
14,538

 
13,555

Contractholder payables
 
4,776

 
4,785

Payables for reinsurance premiums
 
591

 
289

Deferred taxes
 
87

 
—

Debt
 
6,558

 
6,564

Other liabilities
 
5,628

 
5,478

Total liabilities
 
83,251

 
81,339

 
 
 
 
 
Shareholders’ equity
 
 

 
 

Common stock (1,750.0 shares authorized; 260.4 and 263.7 shares issued, 260.3 and 263.6 shares outstanding)
 
23,372

 
23,144

Retained earnings
 
36,135

 
35,204

Accumulated other comprehensive income (loss)
 
206

 
(1,859
)
Treasury stock, at cost (516.7 and 510.9 shares)
 
(34,392
)
 
(33,595
)
Total shareholders’ equity
 
25,321

 
22,894

Total liabilities and shareholders’ equity
 
$
108,572

 
$
104,233





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


5
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in millions)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Common stock
 
 

 
 

 
 

 
 

Balance, beginning of period
 
$
23,243

 
$
22,995

 
$
23,144

 
$
22,886

Employee share-based compensation
 
91

 
12

 
145

 
77

Compensation amortization under share-based plans and other changes
 
38

 
33

 
83

 
77

Balance, end of period
 
23,372

 
23,040

 
23,372

 
23,040

 
 
 
 
 
 
 
 
 
Retained earnings
 
 

 
 

 
 

 
 

Balance, beginning of period
 
35,795

 
33,981

 
35,204

 
33,462

Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
 
—

 
—

 
—

 
22

Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
 
—

 
—

 
—

 
24

Net income
 
557

 
524

 
1,353

 
1,193

Dividends
 
(217
)
 
(209
)
 
(421
)
 
(406
)
Other
 
—

 
—

 
(1
)
 
1

Balance, end of period
 
36,135

 
34,296

 
36,135

 
34,296

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), net of tax
 
 

 
 

 
 

 
 

Balance, beginning of period
 
(682
)
 
(1,322
)
 
(1,859
)
 
(343
)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018
 
—

 
—

 
—

 
(22
)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018
 
—

 
—

 
—

 
(24
)
Other comprehensive income (loss)
 
888

 
(366
)
 
2,065

 
(1,299
)
Balance, end of period
 
206

 
(1,688
)
 
206

 
(1,688
)
 
 
 
 
 
 
 
 
 
Treasury stock, at cost
 
 

 
 

 
 

 
 

Balance, beginning of period
 
(34,016
)
 
(32,675
)
 
(33,595
)
 
(32,274
)
Treasury stock acquired — share repurchase authorization
 
(375
)
 
(350
)
 
(750
)
 
(700
)
Net shares acquired related to employee share-based compensation plans
 
(1
)
 
—

 
(47
)
 
(51
)
Balance, end of period
 
(34,392
)
 
(33,025
)
 
(34,392
)
 
(33,025
)
 
 
 
 
 
 
 
 
 
Total shareholders’ equity
 
$
25,321

 
$
22,623

 
$
25,321

 
$
22,623

 
 
 
 
 
 
 
 
 
Common shares outstanding
 
 

 
 

 
 

 
 

Balance, beginning of period
 
261.9

 
270.2

 
263.6

 
271.4

Treasury stock acquired — share repurchase authorization
 
(2.6
)
 
(2.7
)
 
(5.5
)
 
(5.2
)
Net shares issued under employee share-based compensation plans
 
1.0

 
0.2

 
2.2

 
1.5

Balance, end of period
 
260.3

 
267.7

 
260.3

 
267.7

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

6
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in millions)
 
 
Six Months Ended
 
 
June 30,
 
 
2019
 
2018
Cash flows from operating activities
 
 

 
 

Net income
 
$
1,353

 
$
1,193

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

 
 

Net realized investment gains
 
(78
)
 
(25
)
Depreciation and amortization
 
401

 
411

Deferred federal income tax expense (benefit)
 
10

 
(70
)
Amortization of deferred acquisition costs
 
2,251

 
2,142

Equity in income from other investments
 
(132
)
 
(169
)
Premiums receivable
 
(779
)
 
(660
)
Reinsurance recoverables
 
151

 
29

Deferred acquisition costs
 
(2,408
)
 
(2,284
)
Claims and claim adjustment expense reserves
 
329

 
435

Unearned premium reserves
 
958

 
879

Other
 
(264
)
 
(183
)
Net cash provided by operating activities
 
1,792

 
1,698

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Proceeds from maturities of fixed maturities
 
3,038

 
3,657

Proceeds from sales of investments:
 
 

 
 

Fixed maturities
 
1,495

 
2,607

Equity securities
 
71

 
92

Other investments
 
240

 
189

Purchases of investments:
 
 

 
 

Fixed maturities
 
(5,708
)
 
(7,952
)
Equity securities
 
(41
)
 
(60
)
Real estate investments
 
(85
)
 
(44
)
Other investments
 
(262
)
 
(275
)
Net sales of short-term securities
 
497

 
1,202

Securities transactions in course of settlement
 
223

 
279

Other
 
(169
)
 
(152
)
Net cash used in investing activities
 
(701
)
 
(457
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Treasury stock acquired — share repurchase authorization
 
(750
)
 
(700
)
Treasury stock acquired — net employee share-based compensation
 
(47
)
 
(51
)
Dividends paid to shareholders
 
(419
)
 
(404
)
Payment of debt
 
(500
)
 
(600
)
Issuance of debt
 
492

 
491

Issuance of common stock — employee share options
 
174

 
98

Net cash used in financing activities
 
(1,050
)
 
(1,166
)
Effect of exchange rate changes on cash
 
2

 
(4
)
Net increase in cash
 
43

 
71

Cash at beginning of year
 
373

 
344

Cash at end of period
 
$
416

 
$
415

 
 
 
 
 
Supplemental disclosure of cash flow information
 
 

 
 

Income taxes paid
 
$
325

 
$
238

Interest paid
 
$
171

 
$
175

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

7
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.     BASIS OF PRESENTATION AND ACCOUNTING POLICIES
 
Basis of Presentation
 
The interim consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). These financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited.  In the opinion of the Company’s management, all adjustments necessary for a fair presentation have been reflected.  Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted.  All material intercompany transactions and balances have been eliminated.  The accompanying interim consolidated financial statements and related notes should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the Company’s 2018 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.
 
Adoption of Accounting Standards

Leases

Effective for the quarter ended March 31, 2019, the Company adopted the updated guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption.  Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance.  The Company also elected to apply all practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption, including using hindsight to determine the lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $320 million as part of other assets and a lease liability of $384 million as part of other liabilities in the consolidated balance sheet, as well as de-recognizing the liability for deferred rent that was required under the previous guidance, for its corporate real estate agreements at March 31, 2019.  The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Effective for the quarter ended March 31, 2019, the Company adopted the updated guidance regarding Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, and applied the guidance prospectively.  The updated guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized.  The updated guidance also requires the entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. The adoption of the updated guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

For additional information regarding accounting standards that the Company adopted during the periods presented, see note 1 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.

Accounting Standards Not Yet Adopted
 
For information regarding accounting standards that the Company has not yet adopted, see the “Other Accounting Standards Not Yet Adopted” section of note 1 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.


8
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
1.    BASIS OF PRESENTATION AND ACCOUNTING POLICIES, Continued

Nature of Operations
 
The Company’s results are reported in the following three business segments — Business 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 the 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 2018 Annual Report.
 
2.    SEGMENT INFORMATION
 
The following tables summarize the components of the Company’s revenues, income and total assets by reportable business segments:
(For the three months ended June 30, in millions)
 
Business
Insurance
 
Bond & Specialty
Insurance
 
Personal
Insurance
 
Total
Reportable
Segments
 
 
 
 
 
 
 
 
 
2019
 
 

 
 

 
 

 
 

Premiums
 
$
3,783

 
$
632

 
$
2,573

 
$
6,988

Net investment income
 
481

 
58

 
109

 
648

Fee income
 
111

 
—

 
5

 
116

Other revenues
 
30

 
6

 
21

 
57

Total segment revenues (1)
 
$
4,405

 
$
696

 
$
2,708

 
$
7,809

Segment income (1)
 
$
351

 
$
174

 
$
88

 
$
613

 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

Premiums
 
$
3,641

 
$
601

 
$
2,453

 
$
6,695

Net investment income
 
440

 
57

 
98

 
595

Fee income
 
107

 
—

 
5

 
112

Other revenues
 
20

 
5

 
14

 
39

Total segment revenues (1)
 
$
4,208

 
$
663

 
$
2,570

 
$
7,441

Segment income (loss) (1)
 
$
385

 
$
204

 
$
(17
)
 
$
572


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


9
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2.    SEGMENT INFORMATION, Continued

(For the six months ended June 30, in millions)
 
Business
Insurance
 
Bond & Specialty
Insurance
 
Personal
Insurance
 
Total
Reportable
Segments
2019
 
 

 
 

 
 

 
 

Premiums
 
$
7,525

 
$
1,238

 
$
5,080

 
$
13,843

Net investment income
 
908

 
114

 
208

 
1,230

Fee income
 
215

 
—

 
10

 
225

Other revenues
 
73

 
12

 
43

 
128

Total segment revenues (1)
 
$
8,721

 
$
1,364

 
$
5,341

 
$
15,426

Segment income (1)
 
$
765

 
$
312

 
$
366

 
$
1,443

 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

Premiums
 
$
7,209

 
$
1,183

 
$
4,840

 
$
13,232

Net investment income
 
886

 
115

 
197

 
1,198

Fee income
 
206

 
—

 
9

 
215

Other revenues
 
51

 
11

 
31

 
93

Total segment revenues (1)
 
$
8,352

 
$
1,309

 
$
5,077

 
$
14,738

Segment income (1)
 
$
837

 
$
377

 
$
112

 
$
1,326


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


10
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2.    SEGMENT INFORMATION, Continued

Business Segment Reconciliations
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Revenue reconciliation
 
 

 
 

 
 

 
 

Earned premiums
 
 

 
 

 
 

 
 

Business Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Workers’ compensation
 
$
950

 
$
973

 
$
1,922

 
$
1,944

Commercial automobile
 
647

 
587

 
1,275

 
1,149

Commercial property
 
473

 
453

 
933

 
891

General liability
 
585

 
535

 
1,152

 
1,056

Commercial multi-peril
 
856

 
822

 
1,696

 
1,627

Other
 
9

 
6

 
17

 
13

Total Domestic
 
3,520

 
3,376

 
6,995

 
6,680

International
 
263

 
265

 
530

 
529

Total Business Insurance
 
3,783

 
3,641

 
7,525

 
7,209

Bond & Specialty Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Fidelity and surety
 
258

 
253

 
504

 
499

General liability
 
266

 
248

 
523

 
490

Other
 
53

 
49

 
105

 
96

Total Domestic
 
577

 
550

 
1,132

 
1,085

International
 
55

 
51

 
106

 
98

Total Bond & Specialty Insurance
 
632

 
601

 
1,238

 
1,183

Personal Insurance:
 
 

 
 

 
 

 
 

Domestic:
 
 

 
 

 
 

 
 

Automobile
 
1,321

 
1,261

 
2,618

 
2,486

Homeowners and Other
 
1,078

 
1,022

 
2,117

 
2,017

Total Domestic
 
2,399

 
2,283

 
4,735

 
4,503

International
 
174

 
170

 
345

 
337

Total Personal Insurance
 
2,573

 
2,453

 
5,080

 
4,840

Total earned premiums
 
6,988

 
6,695

 
13,843

 
13,232

Net investment income
 
648

 
595

 
1,230

 
1,198

Fee income
 
116

 
112

 
225

 
215

Other revenues
 
57

 
39

 
128

 
93

Total segment revenues
 
7,809

 
7,441

 
15,426

 
14,738

Other revenues
 
—

 
—

 
1

 
—

Net realized investment gains
 
25

 
36

 
78

 
25

Total revenues
 
$
7,834

 
$
7,477

 
$
15,505

 
$
14,763

Income reconciliation, net of tax
 
 

 
 

 
 

 
 

Total segment income
 
$
613

 
$
572

 
$
1,443

 
$
1,326

Interest Expense and Other (1)
 
(76
)
 
(78
)
 
(151
)
 
(154
)
Core income
 
537

 
494

 
1,292

 
1,172

Net realized investment gains
 
20

 
30

 
61

 
21

Net income
 
$
557

 
$
524

 
$
1,353

 
$
1,193

_________________________________________________________
(1) The primary component of Interest Expense and Other was after-tax interest expense of $70 million and $71 million for the three months ended June 30, 2019 and 2018, respectively, and $140 million and $141 million for the six months ended June 30, 2019 and 2018, respectively.

11
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
2.    SEGMENT INFORMATION, Continued

(in millions)
 
June 30,
2019
 
December 31,
2018
Asset reconciliation
 
 

 
 

Business Insurance
 
$
82,762

 
$
78,965

Bond & Specialty Insurance
 
8,445

 
8,693

Personal Insurance
 
16,602

 
15,943

Total assets by reportable segment
 
107,809

 
103,601

Other assets (1)
 
763

 
632

Total consolidated assets
 
$
108,572

 
$
104,233

 _________________________________________________________
(1)
The primary components of other assets at both June 30, 2019 and December 31, 2018 were accrued over-funded benefit plan assets related to the Company’s qualified domestic pension plan and other intangible assets.

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, 2019, in millions)
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
2,000

 
$
20

 
$
2

 
$
2,018

Obligations of states, municipalities and political subdivisions:
 
 

 
 

 
 

 
 

Local general obligation
 
15,187

 
692

 
1

 
15,878

Revenue
 
9,701

 
499

 
—

 
10,200

State general obligation
 
1,273

 
53

 
—

 
1,326

Pre-refunded
 
2,251

 
75

 
—

 
2,326

Total obligations of states, municipalities and political subdivisions
 
28,412

 
1,319

 
1

 
29,730

Debt securities issued by foreign governments
 
1,112

 
14

 
1

 
1,125

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,839

 
90

 
4

 
2,925

All other corporate bonds
 
30,371

 
982

 
32

 
31,321

Redeemable preferred stock
 
50

 
3

 
—

 
53

Total
 
$
64,784

 
$
2,428

 
$
40

 
$
67,172


 

12
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.    INVESTMENTS, Continued

 
 
Amortized
 
Gross Unrealized
 
Fair
(at December 31, 2018, in millions)
 
Cost
 
Gains
 
Losses
 
Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
2,076

 
$
4

 
$
16

 
$
2,064

Obligations of states, municipalities and political subdivisions:
 
 

 
 

 
 

 
 

Local general obligation
 
14,473

 
219

 
120

 
14,572

Revenue
 
9,755

 
172

 
74

 
9,853

State general obligation
 
1,329

 
18

 
13

 
1,334

Pre-refunded
 
2,772

 
80

 
—

 
2,852

Total obligations of states, municipalities and political subdivisions
 
28,329

 
489

 
207

 
28,611

Debt securities issued by foreign governments
 
1,255

 
7

 
5

 
1,257

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,557

 
54

 
38

 
2,573

All other corporate bonds
 
29,307

 
156

 
583

 
28,880

Redeemable preferred stock
 
77

 
2

 
—

 
79

Total
 
$
63,601

 
$
712

 
$
849

 
$
63,464


 
Pre-refunded bonds of $2.33 billion and $2.85 billion at June 30, 2019 and December 31, 2018, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities.  These trusts were created to fund the payment of principal and interest due under the bonds.
 
Proceeds from sales of fixed maturities classified as available for sale were $1.50 billion and $2.61 billion during the six months ended June 30, 2019 and 2018, respectively. Gross gains of $35 million and $24 million and gross losses of $4 million and $11 million were realized on those sales during the six months ended June 30, 2019 and 2018, respectively.
 
Equity Securities
 
The cost and fair value of investments in equity securities were as follows:
 
 
 
 
 
 
Fair
(at June 30, 2019, in millions)
 
Cost
 
Gross Gains
 
Gross Losses
 
Value
Public common stock
 
$
337

 
$
31

 
$
5

 
$
363

Non-redeemable preferred stock
 
36

 
7

 
—

 
43

Total
 
$
373

 
$
38

 
$
5

 
$
406


 
 
 
 
 
 
 
Fair
(at December 31, 2018, in millions)
 
Cost
 
Gross Gains
 
Gross Losses
 
Value
Public common stock
 
$
338

 
$
2

 
$
24

 
$
316

Non-redeemable preferred stock
 
44

 
8

 
—

 
52

Total
 
$
382

 
$
10

 
$
24

 
$
368


 
For the six months ended June 30, 2019, the Company recognized $45 million of net gains on equity securities still held as of June 30, 2019. For the six months ended June 30, 2018, the Company recognized $3 million of net gains on equity securities still held as of June 30, 2018.


13
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.    INVESTMENTS, Continued

Unrealized Investment Losses
 
The following tables summarize, for all investments in an unrealized loss position at June 30, 2019 and December 31, 2018, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.  The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4 herein and in note 4 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.  The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1 of notes to the consolidated financial statements in the Company’s 2018 Annual Report to determine whether such investments are other-than-temporarily impaired.
 
 
Less than 12 months
 
12 months or longer
 
Total
(at June 30, 2019, in millions)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fixed maturities
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
15

 
$
—

 
$
503

 
$
2

 
$
518

 
$
2

Obligations of states, municipalities and political subdivisions
 
126

 
—

 
232

 
1

 
358

 
1

Debt securities issued by foreign governments
 
24

 
—

 
210

 
1

 
234

 
1

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
88

 
—

 
472

 
4

 
560

 
4

All other corporate bonds
 
277

 
2

 
3,014

 
30

 
3,291

 
32

Total fixed maturities
 
$
530

 
$
2

 
$
4,431

 
$
38

 
$
4,961

 
$
40

 
 
 
Less than 12 months
 
12 months or longer
 
Total
(at December 31, 2018, in millions)
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 

U.S. Treasury securities and obligations of U.S. government and government agencies and authorities
 
$
484

 
$
5

 
$
1,011

 
$
11

 
$
1,495

 
$
16

Obligations of states, municipalities and political subdivisions
 
5,241

 
82

 
3,298

 
125

 
8,539

 
207

Debt securities issued by foreign governments
 
96

 
—

 
328

 
5

 
424

 
5

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
593

 
9

 
1,070

 
29

 
1,663

 
38

All other corporate bonds
 
12,622

 
303

 
6,872

 
280

 
19,494

 
583

Total fixed maturities
 
$
19,036

 
$
399

 
$
12,579

 
$
450

 
$
31,615

 
$
849


 
At June 30, 2019, the amount of gross unrealized losses for all fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost was not significant.
 

14
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
3.    INVESTMENTS, Continued

Impairment Charges
 
Impairment charges included in net realized investment gains in the consolidated statement of income were $1 million for each of the three months ended June 30, 2019 and 2018, and $2 million and $1 million for the six months ended June 30, 2019 and 2018, respectively.

The cumulative amount of credit losses on fixed maturities held at June 30, 2019 and 2018 that were recognized in the consolidated statement of income from other-than-temporary impairments (OTTI) and for which a portion of the OTTI was recognized in other comprehensive income (loss) in the consolidated balance sheet was $54 million and $67 million, respectively.  These credit losses represent less than 1% of the fixed maturity portfolio on a pre-tax basis and less than 1% of shareholders’ equity on an after-tax basis at both dates.  There were no significant changes in the credit component of OTTI during the three months and six months ended June 30, 2019 and 2018 compared to what was disclosed in note 3 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.
 
4.    FAIR VALUE MEASUREMENTS
 
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance.  The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.  The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable.  In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.  The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety.  The three levels of the hierarchy are as follows:
 
•
Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
•
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•
Level 3 - Valuations based on models where significant inputs are not observable.  The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.
 
Valuation of Investments Reported at Fair Value in Financial Statements
 
The Company utilized a pricing service to estimate fair value measurements for approximately 99% of its fixed maturities at both June 30, 2019 and December 31, 2018.
 
While the vast majority of the Company’s fixed maturities are included in Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued by the pricing service and also estimates the fair value of these bonds using another internal pricing matrix that includes 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 this internal pricing matrix was $78 million and $82 million at June 30, 2019 and December 31, 2018, 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 $32 million and $104 million at June 30, 2019 and December 31, 2018, respectively.  Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.

For more information regarding the valuation of the Company’s fixed maturities, equity securities and other investments, see note 4 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.


15
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4.    FAIR VALUE MEASUREMENTS, Continued

Other Liabilities

The Company has a put/call option that was entered into in connection with a business acquisition that allows the Company to acquire the remaining shares of the acquired company at a future date. The fair value of the put/call at June 30, 2019 and December 31, 2018 was $7 million and $10 million, respectively, and was determined using an internal model and is based on the acquired company's financial performance, adjusted for a risk margin and discounted to present value. The Company includes the fair value estimate of the put/call in Level 3.
 
Fair Value Hierarchy
 
The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis.   
(at June 30, 2019, 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
 
$
2,018

 
$
2,018

 
$
—

 
$
—

Obligations of states, municipalities and political subdivisions
 
29,730

 
—

 
29,718

 
12

Debt securities issued by foreign governments
 
1,125

 
—

 
1,125

 
—

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,925

 
—

 
2,925

 
—

All other corporate bonds
 
31,321

 
—

 
31,223

 
98

Redeemable preferred stock
 
53

 
3

 
50

 
—

Total fixed maturities
 
67,172

 
2,021

 
65,041

 
110

Equity securities
 
 

 
 

 
 

 
 

Public common stock
 
363

 
363

 
—

 
—

Non-redeemable preferred stock
 
43

 
19

 
24

 
—

Total equity securities
 
406

 
382

 
24

 
—

Other investments
 
59

 
16

 
—

 
43

Total
 
$
67,637

 
$
2,419

 
$
65,065

 
$
153

 
 
 
 
 
 
 
 
 
Other liabilities
 
$
7

 
$
—

 
$
—

 
$
7

 

16
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
4.    FAIR VALUE MEASUREMENTS, Continued

(at December 31, 2018, 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
 
$
2,064

 
$
2,064

 
$
—

 
$
—

Obligations of states, municipalities and political subdivisions
 
28,611

 
—

 
28,599

 
12

Debt securities issued by foreign governments
 
1,257

 
—

 
1,257

 
—

Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
 
2,573

 
—

 
2,554

 
19

All other corporate bonds
 
28,880

 
—

 
28,725

 
155

Redeemable preferred stock
 
79

 
3

 
76

 
—

Total fixed maturities
 
63,464

 
2,067

 
61,211

 
186

Equity securities
 
 

 
 

 
 

 
 

Public common stock
 
316

 
316

 
—

 
—

Non-redeemable preferred stock
 
52

 
30

 
22

 
—

Total equity securities
 
368

 
346

 
22

 
—

Other investments
 
52

 
16

 
—

 
36

Total
 
$
63,884

 
$
2,429

 
$
61,233

 
$
222

 
 
 
 
 
 
 
 
 
Other liabilities
 
$
10

 
$
—

 
$
—

 
$
10


 
There was no significant activity in Level 3 of the hierarchy during the six months ended June 30, 2019 or the year ended December 31, 2018.
 
Financial Instruments Disclosed, But Not Carried, At Fair Value
 
The following tables present the carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such assets and liabilities are categorized.
(at June 30, 2019, in millions)
 
Carrying
Value
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 

 
 

 
 

 
 

 
 

Short-term securities
 
$
3,487

 
$
3,487

 
$
229

 
$
3,209

 
$
49

Financial liabilities
 
 

 
 

 
 

 
 

 
 

Debt
 
$
6,458

 
$
7,936

 
$
—

 
$
7,936

 
$
—

Commercial paper
 
$
100

 
$
100

 
$
—

 
$
100

 
$
—

 
(at December 31, 2018, in millions)
 
Carrying
Value
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 

 
 

 
 

 
 

 
 

Short-term securities
 
$
3,985

 
$
3,985

 
$
632

 
$
3,316

 
$
37

Financial liabilities
 
 

 
 

 
 

 
 

 
 

Debt
 
$
6,464

 
$
7,128

 
$
—

 
$
7,128

 
$
—

Commercial paper
 
$
100

 
$
100

 
$
—

 
$
100

 
$
—


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, 2019 or year ended December 31, 2018.


17
Table of Contents
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 Company’s goodwill by segment.  Each reportable segment includes goodwill associated with the Company’s international business which is subject to the impact of changes in foreign currency exchange rates.
(in millions)
 
June 30,
2019
 
December 31,
2018
Business Insurance
 
$
2,584

 
$
2,585

Bond & Specialty Insurance
 
550

 
550

Personal Insurance
 
783

 
776

Other
 
26

 
26

Total
 
$
3,943

 
$
3,937


Other Intangible Assets
 
The following tables present a summary of the Company’s other intangible assets by major asset class.
(at June 30, 2019, in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Subject to amortization
 
 
 
 
 
 
Customer-related
 
$
96

 
$
16

 
$
80

Contract-based (1)
 
205

 
176

 
29

Total subject to amortization
 
301

 
192

 
109

Not subject to amortization
 
226

 
—

 
226

Total
 
$
527

 
$
192

 
$
335

 
(at December 31, 2018, in millions)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Subject to amortization
 
 
 
 
 
 
Customer-related
 
$
98

 
$
12

 
$
86

Contract-based (1)
 
208

 
175

 
33

Total subject to amortization
 
306

 
187

 
119

Not subject to amortization
 
226

 
—

 
226

Total
 
$
532

 
$
187

 
$
345

 _________________________________________________________
(1)
Contract-based intangible assets subject to amortization are comprised of fair value adjustments on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangible assets. Fair value adjustments recorded in connection with insurance acquisitions were based on management’s estimate of nominal claims and claim adjustment expense reserves and reinsurance recoverables. The method used calculated a risk adjustment to a risk-free discounted reserve that would, if reserves ran off as expected, produce results that yielded the assumed cost-of-capital on the capital supporting the loss reserves.  The fair value adjustments are reported as other intangible assets on the consolidated balance sheet, and the amounts measured in accordance with the acquirer’s accounting policies for insurance contracts have been reported as part of the claims and claim adjustment expense reserves and reinsurance recoverables. The intangible assets are being recognized into income over the expected payment pattern. Because the time value of money and the risk adjustment (cost of capital) components of the intangible assets run off at different rates, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.
 
Amortization expense of intangible assets was $4 million for both the three months ended June 30, 2019 and 2018, and $8 million for both the six months ended June 30, 2019 and 2018.  Amortization expense for all intangible assets subject to amortization is estimated to be $7 million for the remainder of 2019, $14 million in 2020, $13 million in 2021, $13 million in 2022 and $12 million

18
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued

5.    GOODWILL AND OTHER INTANGIBLE ASSETS, Continued

in 2023. Amortization expense for intangible assets arising from insurance contracts acquired in a business combination is estimated to be $3 million for the remainder of 2019, $5 million in 2020, $4 million in 2021, $3 million in 2022 and $3 million in 2023.

6.    INSURANCE CLAIM RESERVES
 
Claims and claim adjustment expense reserves were as follows:
(in millions)
 
June 30,
2019
 
December 31,
2018
Property-casualty
 
$
51,059

 
$
50,653

Accident and health
 
14

 
15

Total
 
$
51,073

 
$
50,668


 
The following table presents a reconciliation of beginning and ending property casualty reserve balances for claims and claim adjustment expenses:
 
 
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
Claims and claim adjustment expense reserves at beginning of year
 
$
50,653

 
$
49,633

Less reinsurance recoverables on unpaid losses
 
8,182

 
8,123

Net reserves at beginning of year
 
42,471

 
41,510

 
 
 
 
 
Estimated claims and claim adjustment expenses for claims arising in the current year
 
9,329

 
9,084

Estimated decrease in claims and claim adjustment expenses for claims arising in prior years
 
(118
)
 
(268
)
Total increases
 
9,211

 
8,816

 
 
 
 
 
Claims and claim adjustment expense payments for claims arising in:
 
 

 
 

Current year
 
2,810

 
2,851

Prior years
 
5,897

 
5,454

Total payments
 
8,707

 
8,305

Unrealized foreign exchange (gain) loss
 
62

 
(102
)
Net reserves at end of period
 
43,037

 
41,919

Plus reinsurance recoverables on unpaid losses
 
8,022

 
8,026

Claims and claim adjustment expense reserves at end of period
 
$
51,059

 
$
49,945


 
Gross claims and claim adjustment expense reserves at June 30, 2019 increased by $406 million from December 31, 2018, primarily reflecting the impact of higher volumes of insured exposures and loss cost trends for the current accident year, partially offset by net favorable prior year reserve development.
 
Reinsurance recoverables on unpaid losses at June 30, 2019 decreased by $160 million from December 31, 2018, primarily reflecting the impact of cash collections in the first six months of 2019.

The Company continues to evaluate the estimated realizable value of its subrogation claims related to the 2017 and 2018 California wildfires and the impact of recent developments, including the recent re-organization proposals by various stakeholders in the Pacific Gas & Electric Company (PG&E) bankruptcy. Due to the risks and uncertainties associated with the PG&E bankruptcy and other factors, the Company has not recognized a subrogation benefit related to these claims.
 

19
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
6.    INSURANCE CLAIM RESERVES, Continued

Prior Year Reserve Development
 
The following disclosures regarding reserve development are on a “net of reinsurance” basis.
 
For the six months ended June 30, 2019 and 2018, estimated claims and claim adjustment expenses incurred included $118 million and $268 million, respectively, of net favorable development for claims arising in prior years, including $174 million and $336 million, respectively, of net favorable prior year reserve development and $25 million of accretion of discount in each period that impacted the Company's results of operations.
 
Business Insurance. Net favorable prior year reserve development in the second quarter of 2019 totaled $71 million, primarily driven by better than expected loss experience in the segment's domestic operations in (i) the workers’ compensation product line for multiple accident years, partially offset by higher than expected loss experience in the segment's domestic operations in (ii) the general liability product line for primary and excess coverages for multiple accident years, including a $60 million increase to environmental reserves for accident years 2009 and prior and (iii) the commercial automobile product line for recent accident years, as well as (iv) higher than expected loss experience in the segment's international operations. Net favorable prior year reserve development in the second quarter of 2018 totaled $84 million, primarily driven by better than expected loss experience in the segment's domestic operations in the workers’ compensation product line for multiple accident years, partially offset by higher than expected loss experience in the segment's domestic operations in the general liability product line, including a $55 million increase to environmental reserves, for accident years 2008 and prior.

Net favorable prior year reserve development in the first six months of 2019 totaled $50 million, primarily driven by better than expected loss experience in the segment's domestic operations in (i) the workers’ compensation product line for multiple accident years and (ii) the commercial property product line for recent accident years, partially offset by higher than expected loss experience in the segment's domestic operations in (iii) the general liability product line for primary and excess coverages for multiple accident years, including the impact of (a) the enactment of legislation by a number of states, which extended the statute of limitations for childhood sexual molestation claims and (b) a $60 million increase to environmental reserves, both of which impacted accident years 2009 and prior, (iv) the commercial automobile product line for recent accident years and (v) the commercial multi-peril product line for recent accident years. Net favorable prior year reserve development in the first six months of 2018 totaled $150 million, primarily driven by better than expected loss experience in the segment's domestic operations in (i) the workers' compensation product line for multiple accident years and (ii) the commercial property product line for recent accident years, partially offset by higher than expected loss experience in the segment's domestic operations in (iii) the general liability product line, including a $55 million increase to environmental reserves, for accident years 2008 and prior and (iv) the commercial automobile product line for recent accident years.

Bond & Specialty Insurance.  Net favorable prior year reserve development in the second quarter and first six months of 2019 totaled $39 million and $42 million, respectively, and net favorable prior year reserve development in the second quarter and first six months of 2018 totaled $89 million and $124 million, respectively. Net favorable prior year reserve development in all periods was primarily driven by better than expected loss experience in the segment's domestic operations in the general liability product line for multiple accident years.
 
Personal Insurance.  Net favorable prior year reserve development in each of the second quarters of 2019 and 2018 totaled $13 million. Net favorable prior year reserve development in the first six months of 2019 totaled $82 million, primarily driven by better than expected loss experience in the segment's domestic operations in both the automobile and homeowners and other product lines for recent accident years. Net favorable prior year reserve development in the first six months of 2018 totaled $62 million, primarily driven by better than expected loss experience in the segment's domestic operations in the automobile product line for recent accident years.


20
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued


7.
OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
 
The following tables present the changes in the Company’s accumulated other comprehensive income (loss) (AOCI) for the three months and six months ended June 30, 2019.
 
 
Changes in Net Unrealized Gains (Losses) on Investment Securities
 
 
 
 
 
 
(in millions)
 
Having No Credit
Losses Recognized in
the Consolidated
Statement of Income
 
Having Credit 
Losses Recognized 
in the Consolidated
Statement of 
Income
 
Net Benefit Plan Assets and
Obligations
Recognized in
Shareholders’ 
Equity
 
Net Unrealized
Foreign Currency
Translation
 
Total Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
 
810

 
197

 
(863
)
 
(826
)
 
(682
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) (OCI) before reclassifications, net of tax
 
884

 
(3
)
 
—

 
6

 
887

Amounts reclassified from AOCI, net of tax
 
(10
)
 
—

 
11

 
—

 
1

Net OCI, current period
 
874

 
(3
)
 
11

 
6

 
888

Balance, June 30, 2019
 
$
1,684

 
$
194

 
$
(852
)
 
$
(820
)
 
$
206


 
 
 
Changes in Net Unrealized Gains (Losses) on Investment Securities
 
 
 
 
 
 
(in millions)
 
Having No Credit
Losses Recognized in
the Consolidated
Statement of Income
 
Having Credit 
Losses Recognized 
in the Consolidated
Statement of 
Income
 
Net Benefit Plan Assets and
Obligations
Recognized in
Shareholders’ 
Equity
 
Net Unrealized
Foreign Currency
Translation
 
Total Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
(306
)
 
$
193

 
$
(873
)
 
$
(873
)
 
$
(1,859
)
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (OCI) before reclassifications, net of tax
 
2,013

 
1

 
—

 
53

 
2,067

Amounts reclassified from AOCI, net of tax
 
(23
)
 
—

 
21

 
—

 
(2
)
Net OCI, current period
 
1,990

 
$
1

 
$
21

 
$
53

 
$
2,065

Balance, June 30, 2019
 
$
1,684

 
$
194

 
$
(852
)
 
$
(820
)
 
$
206




21
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
7.
OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

The following table presents the pre-tax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit).
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Changes in net unrealized gains (losses) on investment securities:
 
 

 
 

 
 

 
 

Having no credit losses recognized in the consolidated statement of income
 
$
1,108

 
$
(298
)
 
$
2,524

 
$
(1,501
)
Income tax expense (benefit)
 
234

 
(63
)
 
534

 
(316
)
Net of taxes
 
874

 
(235
)
 
1,990

 
(1,185
)
 
 
 
 
 
 
 
 
 
Having credit losses recognized in the consolidated statement of income
 
(4
)
 
(12
)
 
1

 
(14
)
Income tax expense (benefit)
 
(1
)
 
(2
)
 
—

 
(3
)
Net of taxes
 
(3
)
 
(10
)
 
1

 
(11
)
 
 
 
 
 
 
 
 
 
Net changes in benefit plan assets and obligations
 
14

 
21

 
26

 
43

Income tax expense
 
3

 
4

 
5

 
9

Net of taxes
 
11

 
17

 
21

 
34

 
 
 
 
 
 
 
 
 
Net changes in unrealized foreign currency translation
 
5

 
(158
)
 
55

 
(152
)
Income tax expense (benefit)
 
(1
)
 
(20
)
 
2

 
(15
)
Net of taxes
 
6

 
(138
)
 
53

 
(137
)
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
1,123

 
(447
)
 
2,606

 
(1,624
)
Total income tax expense (benefit)
 
235

 
(81
)
 
541

 
(325
)
Total other comprehensive income (loss), net of taxes
 
$
888

 
$
(366
)
 
$
2,065

 
$
(1,299
)

 

22
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
7.
OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME, Continued

The following table presents the pre-tax and related income tax (expense) benefit components of the amounts reclassified from the Company’s AOCI to the Company’s consolidated statement of income.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Reclassification adjustments related to unrealized gains (losses) on investment securities:
 
 
 
 
 
 

 
 

Having no credit losses recognized in the consolidated statement of income (1)
 
$
(13
)
 
$
(12
)
 
$
(29
)
 
$
(12
)
Income tax expense (2)
 
(3
)
 
(3
)
 
(6
)
 
(3
)
Net of taxes
 
(10
)
 
(9
)
 
(23
)
 
(9
)
 
 
 
 
 
 
 
 
 
Having credit losses recognized in the consolidated statement of income (1)
 
—

 
—

 
—

 
—

Income tax benefit (2)
 
—

 
—

 
—

 
—

Net of taxes
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Reclassification adjustment related to benefit plan assets and obligations:
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses (3)
 
6

 
8

 
11

 
17

General and administrative expenses (3)
 
7

 
13

 
15

 
26

Total
 
13

 
21

 
26

 
43

Income tax benefit (2)
 
2

 
4

 
5

 
9

Net of taxes
 
11

 
17

 
21

 
34

 
 
 
 
 
 
 
 
 
Reclassification adjustment related to foreign currency translation (1)
 
—

 
—

 
—

 
—

Income tax benefit (2)
 
—

 
—

 
—

 
—

Net of taxes
 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
Total reclassifications
 
—

 
9

 
(3
)
 
31

Total income tax (expense) benefit
 
(1
)
 
1

 
(1
)
 
6

Total reclassifications, net of taxes
 
$
1

 
$
8

 
$
(2
)
 
$
25

 _________________________________________________________
(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) expenses on the consolidated statement of income.

8.     DEBT
 
Debt Issuance.  On March 4, 2019, the Company issued $500 million aggregate principal amount of 4.10% senior notes that will mature on March 4, 2049.  The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $492 million.  Interest on the senior notes is payable semi-annually in arrears on March 4 and September 4.  Prior to September 4, 2048, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excluding September 4, 2048 on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current Treasury rate (as defined in the senior notes), plus 20 basis points.  On or after September 4, 2048, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

23
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
8.                                      DEBT, Continued


Debt Repayment. On June 2, 2019, the Company's $500 million, 5.90% senior notes matured and were fully paid.

Commercial Paper.  The Company had $100 million of commercial paper outstanding at both June 30, 2019 and December 31, 2018.

9.     COMMON SHARE REPURCHASES
 
During the three months and six months ended June 30, 2019, the Company repurchased 2.6 million and 5.5 million shares, respectively, under its share repurchase authorization, for a total cost of $375 million and $750 million, respectively.  The average cost per share repurchased was $145.87 and $137.15, respectively.  In addition, the Company acquired 3,460 shares and 0.3 million shares for a total cost of $0.5 million and $47 million during the three months and six months ended June 30, 2019, respectively, 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 unit awards and performance share awards, and shares used by employees to cover the price of certain stock options that were exercised. At June 30, 2019, the Company had $2.54 billion of capacity remaining under its share repurchase authorization.

10.     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
June 30,
 
Six Months Ended
June 30,
(in millions, except per share amounts)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Basic and Diluted
 
 
 
 
 
 

 
 

Net income, as reported
 
$
557

 
$
524

 
$
1,353

 
$
1,193

Participating share-based awards — allocated income
 
(4
)
 
(4
)
 
(10
)
 
(9
)
Net income available to common shareholders — basic and diluted
 
$
553

 
$
520

 
$
1,343

 
$
1,184

 
 
 
 
 
 
 
 
 
Common Shares
 
 
 
 
 
 

 
 

Basic
 
 
 
 
 
 

 
 

Weighted average shares outstanding
 
261.3

 
268.7

 
262.1

 
269.8

 
 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 

 
 

Weighted average shares outstanding
 
261.3

 
268.7

 
262.1

 
269.8

Weighted average effects of dilutive securities — stock options and performance shares
 
2.4

 
2.4

 
2.1

 
2.7

Total
 
263.7

 
271.1

 
264.2

 
272.5

 
 
 
 
 
 
 
 
 
Net Income per Common Share
 
 
 
 
 
 

 
 

Basic
 
$
2.11

 
$
1.93

 
$
5.12

 
$
4.39

Diluted
 
$
2.10

 
$
1.92

 
$
5.08

 
$
4.35




24
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued


11.      SHARE-BASED INCENTIVE COMPENSATION

The following information relates to fully vested stock option awards at June 30, 2019:
 
                                           Stock Options
 
Number
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life
Remaining
 
Aggregate
Intrinsic
Value
($ in millions)
Vested at end of period (1)
 
6,120,874

 
$
105.70

 
5.8 years
 
$
268

Exercisable at end of period
 
4,202,289

 
$
95.63

 
4.5 years
 
$
226

_________________________________________________________
(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 $35 million and $33 million for the three months ended June 30, 2019 and 2018, respectively, and $80 million and $77 million for the six months ended June 30, 2019 and 2018, respectively. The related tax benefits recognized in the consolidated statement of income were $6 million for each of the three months ended June 30, 2019 and 2018, and $14 million for each of the six months ended June 30, 2019 and 2018.

The total unrecognized compensation cost related to all nonvested share-based incentive compensation awards at June 30, 2019 was $202 million, which is expected to be recognized over a weighted-average period of 2.0 years.

12.    PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS
 
The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans recognized in the consolidated statement of income for the three months ended June 30, 2019 and 2018.
 
 
Pension Plans
 
Postretirement Benefit Plans
(for the three months ended June 30, in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net Periodic Benefit Cost:
 
 

 
 

 
 

 
 

Service cost
 
$
29

 
$
33

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Non-service cost:
 
 

 
 

 
 

 
 

Interest cost on benefit obligation
 
$
35

 
$
32

 
$
2

 
$
2

Expected return on plan assets
 
(68
)
 
(66
)
 
—

 
—

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service benefit
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Net actuarial loss
 
14

 
23

 
—

 
—

Total non-service cost (benefit)
 
(20
)
 
(12
)
 
1

 
1

Net periodic benefit cost
 
$
9

 
$
21

 
$
1

 
$
1


 
The following table indicates the line items in which the respective service costs and non-service cost (benefit) are presented in the consolidated statement of income for the three months ended June 30, 2019 and 2018.
 

25
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
12.                PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS, Continued

 
 
Pension Plans
 
Postretirement Benefit Plans
(for the three months ended June 30, in millions)
 
2019
 
2018
 
2019
 
2018
Service Cost:
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
$
12

 
$
14

 
$
—

 
$
—

General and administrative expenses
 
17

 
19

 
—

 
—

Total service cost
 
29

 
33

 
—

 
—

 
 
 
 
 
 
 
 
 
Non-Service Cost (Benefit):
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
(8
)
 
(5
)
 
1

 
1

General and administrative expenses
 
(12
)
 
(7
)
 
—

 
—

Total non-service cost (benefit)
 
(20
)
 
(12
)
 
1

 
1

Net periodic benefit cost
 
$
9

 
$
21

 
$
1

 
$
1


The following table summarizes the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans recognized in the consolidated statement of income for the six months ended June 30, 2019 and 2018.

 
 
Pension Plans
 
Postretirement Benefit Plans
(for the six months ended June 30, in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net Periodic Benefit Cost:
 
 

 
 

 
 

 
 

Service cost
 
$
59

 
$
66

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
Non-service cost:
 
 

 
 

 
 

 
 

Interest cost on benefit obligation
 
70

 
63

 
4

 
4

Expected return on plan assets
 
(137
)
 
(132
)
 
—

 
—

Amortization of unrecognized:
 
 
 
 
 
 
 
 
Prior service benefit
 
(1
)
 
(1
)
 
(2
)
 
(2
)
Net actuarial loss
 
28

 
46

 
—

 
—

Total non-service cost (benefit)
 
(40
)
 
(24
)
 
2

 
2

Net periodic benefit cost
 
$
19

 
$
42

 
$
2

 
$
2



The following table indicates the line items in which the respective service costs and non-service cost (benefit) are presented in the consolidated statement of income for the six months ended June 30, 2019 and 2018.
 
 
Pension Plans
 
Postretirement Benefit Plans
(for the six months ended June 30, in millions)
 
2019
 
2018
 
2019
 
2018
Service Cost:
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
$
24

 
$
27

 
$
—

 
$
—

General and administrative expenses
 
35

 
39

 
—

 
—

Total service cost
 
59

 
66

 
—

 
—

 
 
 
 
 
 
 
 
 
Non-Service Cost (Benefit):
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
(16
)
 
(10
)
 
1

 
1

General and administrative expenses
 
(24
)
 
(14
)
 
1

 
1

Total non-service cost (benefit)
 
(40
)
 
(24
)
 
2

 
2

Net periodic benefit cost
 
$
19

 
$
42

 
$
2

 
$
2




26
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued


13.          LEASES

The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease. See note 1 - Adoption of Accounting Standards - Leases for additional information regarding the accounting for leases.

Most leases include an option to extend or renew the lease term. The exercise of the renewal option is at the Company's discretion. The operating lease liability includes lease payments related to options to extend or renew the lease term if the Company is reasonably certain of exercising those options. The Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

Lease expense is included in general and administrative expenses in the consolidated statement of income. Additional information regarding the Company’s real estate operating leases is as follows:
(in millions)
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
 
 
 
 
 
Lease cost
 
 
 
 
Operating leases
 
$
23

 
$
45

Short-term leases (1)
 
3

 
7

Lease expense
 
26

 
52

Less: sublease income (2)
 
—

 
—

Net lease cost
 
$
26

 
$
52

 
 
 
 
 
Other information on operating leases
 
 
 
 
Cash payments included in the measurement of lease liabilities reported in operating cash flows
 
$
26

 
$
50

Right-of-use assets obtained in exchange for new lease liabilities
 
$
28

 
$
36

Weighted average discount rate
 
3.05
%
 
3.05
%
Weighted average remaining lease term in years
 
5.2 years

 
5.2 years

_________________________________________________________

(1) Leases with an initial term of twelve months or less are not recorded on the balance sheet.
(2) Sublease income consists of rent from third parties of office space and is recognized as part of other revenues in the consolidated statement of income.

The following table presents the contractual maturities of the Company's lease liabilities:
(in millions)
 
Real Estate Lease Liability
 
 
 
Remainder of 2019
 
$
51

2020
 
103

2021
 
89

2022
 
67

2023
 
47

Thereafter
 
80

Total undiscounted lease payments
 
437

Less: present value adjustment
 
42

Operating lease liability
 
$
395




27
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued


14.    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 Company’s properties is subject are described below.
 
Asbestos and Environmental Claims and Litigation
 
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. The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcomes of these disputes are uncertain. In this regard, the Company employs dedicated specialists and comprehensive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances. Currently, it is not possible to predict legal outcomes and their impact on future loss development for claims and litigation relating to asbestos and environmental claims. Any such development could be affected by future court decisions and interpretations, as well as future changes, if any, in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves. In addition, the Company’s estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or changes 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 Company’s 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. The legal costs associated with such lawsuits are expensed in the period in which the costs are incurred. 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 Company’s results of operations or would have a material adverse effect on the Company’s financial position or liquidity.

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 $1.57 billion and $1.60 billion at June 30, 2019 and December 31, 2018, respectively.
 
Guarantees
 
The maximum amount of the Company’s contingent obligation for indemnifications related to the sale of businesses that are quantifiable was $352 million at June 30, 2019.
 
The maximum amount of the Company’s obligation for guarantees of certain investments and third-party loans related to certain investments that are quantifiable was $0 at June 30, 2019. The maximum amount of the Company’s obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at June 30, 2019, all of which is indemnified by a third party.  For more information regarding Company guarantees, see note 16 of notes to the consolidated financial statements in the Company’s 2018 Annual Report.

15.
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 Company’s financial information on the same basis of accounting as the consolidated financial statements. The Travelers Companies, Inc. (excluding its subsidiaries, TRV) has fully and

28
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

unconditionally guaranteed certain debt obligations of Travelers Property Casualty Corp. (TPC) and Travelers Insurance Group Holdings, Inc. (TIGHI), which totaled $700 million at June 30, 2019.
 
Prior to the merger of TPC and The St. Paul Companies, Inc. 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, TIGHI. Concurrent with the merger, TRV 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.
 
CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the three months ended June 30, 2019
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Premiums
 
$
4,786

 
$
2,202

 
$
—

 
$
—

 
$
6,988

Net investment income
 
455

 
181

 
12

 
—

 
648

Fee income
 
116

 
—

 
—

 
—

 
116

Net realized investment gains (1)
 
14

 
6

 
5

 
—

 
25

Other revenues
 
31

 
26

 
—

 
—

 
57

Total revenues
 
5,402

 
2,415

 
17

 
—

 
7,834

 
 
 
 
 
 
 
 
 
 
 
Claims and expenses
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
3,248

 
1,573

 
—

 
—

 
4,821

Amortization of deferred acquisition costs
 
740

 
394

 
—

 
—

 
1,134

General and administrative expenses
 
768

 
352

 
5

 
—

 
1,125

Interest expense
 
12

 
—

 
77

 
—

 
89

Total claims and expenses
 
4,768

 
2,319

 
82

 
—

 
7,169

Income (loss) before income taxes
 
634

 
96

 
(65
)
 
—

 
665

Income tax expense (benefit)
 
122

 
12

 
(26
)
 
—

 
108

Net income of subsidiaries
 
—

 
—

 
596

 
(596
)
 
—

Net income
 
$
512

 
$
84

 
$
557

 
$
(596
)
 
$
557

____________________________________________________
(1)
Total other-than-temporary impairments (OTTI) for the three months ended June 30, 2019, 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
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Total OTTI losses
 
$
—

 
$
(1
)
 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in net realized investment gains
 
$
—

 
$
(1
)
 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in OCI
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the three months ended June 30, 2018
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Premiums
 
$
4,577

 
$
2,118

 
$
—

 
$
—

 
$
6,695

Net investment income
 
412

 
175

 
8

 
—

 
595

Fee income
 
112

 
—

 
—

 
—

 
112

Net realized investment gains (1)
 
18

 
16

 
2

 
—

 
36

Other revenues
 
13

 
27

 
—

 
(1
)
 
39

Total revenues
 
5,132

 
2,336

 
10

 
(1
)
 
7,477

 
 
 
 
 
 
 
 
 
 
 
Claims and expenses
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
3,064

 
1,498

 
—

 
—

 
4,562

Amortization of deferred acquisition costs
 
727

 
354

 
—

 
—

 
1,081

General and administrative expenses
 
766

 
343

 
5

 
(1
)
 
1,113

Interest expense
 
13

 
—

 
77

 
—

 
90

Total claims and expenses
 
4,570

 
2,195

 
82

 
(1
)
 
6,846

Income (loss) before income taxes
 
562

 
141

 
(72
)
 
—

 
631

Income tax expense (benefit)
 
104

 
21

 
(18
)
 
—

 
107

Net income of subsidiaries
 
—

 
—

 
578

 
(578
)
 
—

Net income
 
$
458

 
$
120

 
$
524

 
$
(578
)
 
$
524

 
_________________________________________________________
(1)
Total other-than-temporary impairments (OTTI) for the three months ended June 30, 2018, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (loss) (OCI) were as follows:
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Total OTTI losses
 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in net realized investment gains
 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in OCI
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the six months ended June 30, 2019
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Premiums
 
$
9,475

 
$
4,368

 
$
—

 
$
—

 
$
13,843

Net investment income
 
871

 
336

 
23

 
—

 
1,230

Fee income
 
225

 
—

 
—

 
—

 
225

Net realized investment gains (1)
 
36

 
21

 
21

 
—

 
78

Other revenues
 
69

 
60

 
—

 
—

 
129

Total revenues
 
10,676

 
4,785

 
44

 
—

 
15,505

Claims and expenses
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
6,272

 
2,991

 
—

 
—

 
9,263

Amortization of deferred acquisition costs
 
1,485

 
766

 
—

 
—

 
2,251

General and administrative expenses
 
1,490

 
682

 
10

 
—

 
2,182

Interest expense
 
24

 
—

 
153

 
—

 
177

Total claims and expenses
 
9,271

 
4,439

 
163

 
—

 
13,873

Income (loss) before income taxes
 
1,405

 
346

 
(119
)
 
—

 
1,632

Income tax expense (benefit)
 
268

 
54

 
(43
)
 
—

 
279

Net income of subsidiaries
 
—

 
—

 
1,429

 
(1,429
)
 
—

Net income
 
$
1,137

 
$
292

 
$
1,353

 
$
(1,429
)
 
$
1,353

_________________________________________________________ 
(1)
Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2019, 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
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Total OTTI losses
 
$
(1
)
 
$
(1
)
 
$
—

 
$
—

 
$
(2
)
OTTI losses recognized in net realized investment gains
 
$
(1
)
 
$
(1
)
 
$
—

 
$
—

 
$
(2
)
OTTI losses recognized in OCI
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF INCOME (Unaudited)
For the six months ended June 30, 2018
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Revenues
 
 

 
 

 
 

 
 

 
 

Premiums
 
$
9,045

 
$
4,187

 
$
—

 
$
—

 
$
13,232

Net investment income
 
824

 
360

 
14

 
—

 
1,198

Fee income
 
215

 
—

 
—

 
—

 
215

Net realized investment gains (1)
 
20

 
4

 
1

 
—

 
25

Other revenues
 
40

 
55

 
—

 
(2
)
 
93

Total revenues
 
10,144

 
4,606

 
15

 
(2
)
 
14,763

Claims and expenses
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
5,974

 
2,884

 
—

 
—

 
8,858

Amortization of deferred acquisition costs
 
1,432

 
710

 
—

 
—

 
2,142

General and administrative expenses
 
1,495

 
671

 
11

 
(2
)
 
2,175

Interest expense
 
24

 
—

 
155

 
—

 
179

Total claims and expenses
 
8,925

 
4,265

 
166

 
(2
)
 
13,354

Income (loss) before income taxes
 
1,219

 
341

 
(151
)
 
—

 
1,409

Income tax expense (benefit)
 
210

 
53

 
(47
)
 
—

 
216

Net income of subsidiaries
 
—

 
—

 
1,297

 
(1,297
)
 
—

Net income
 
$
1,009

 
$
288

 
$
1,193

 
$
(1,297
)
 
$
1,193

_________________________________________________________
(1)
Total other-than-temporary impairment (OTTI) for the six months ended June 30, 2018, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (loss) (OCI) were as follows:
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Total OTTI losses
 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in net realized investment gains
 
$
(1
)
 
$
—

 
$
—

 
$
—

 
$
(1
)
OTTI losses recognized in OCI
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the three months ended June 30, 2019
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Net income
 
$
512

 
$
84

 
$
557

 
$
(596
)
 
$
557

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 

 
 

 
 

 
 

 
 

Changes in net unrealized gains (losses) on investment securities:
 
 

 
 

 
 

 
 

 
 

Having no credit losses recognized in the consolidated statement of income
 
786

 
321

 
1

 
—

 
1,108

Having credit losses recognized in the consolidated statement of income
 
(3
)
 
(1
)
 
—

 
—

 
(4
)
Net changes in benefit plan assets and obligations
 
—

 
—

 
14

 
—

 
14

Net changes in unrealized foreign currency translation
 
23

 
(18
)
 
—

 
—

 
5

Other comprehensive income before income taxes and other comprehensive income of subsidiaries
 
806

 
302

 
15

 
—

 
1,123

Income tax expense
 
167

 
67

 
1

 
—

 
235

Other comprehensive income, net of taxes, before other comprehensive income of subsidiaries
 
639

 
235

 
14

 
—

 
888

Other comprehensive income of subsidiaries
 
—

 
—

 
874

 
(874
)
 
—

Other comprehensive income
 
639

 
235

 
888

 
(874
)
 
888

Comprehensive income
 
$
1,151

 
$
319

 
$
1,445

 
$
(1,470
)
 
$
1,445

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
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, 2018
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Net income
 
$
458

 
$
120

 
$
524

 
$
(578
)
 
$
524

 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

Changes in net unrealized gains (losses) on investment securities:
 
 

 
 

 
 

 
 

 
 

Having no credit losses recognized in the consolidated statement of income
 
(209
)
 
(89
)
 
—

 
—

 
(298
)
Having credit losses recognized in the consolidated statement of income
 
(10
)
 
(2
)
 
—

 
—

 
(12
)
Net changes in benefit plan assets and obligations
 
—

 
—

 
21

 
—

 
21

Net changes in unrealized foreign currency translation
 
(77
)
 
(81
)
 
—

 
—

 
(158
)
Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries
 
(296
)
 
(172
)
 
21

 
—

 
(447
)
Income tax benefit
 
(58
)
 
(21
)
 
(2
)
 
—

 
(81
)
Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries
 
(238
)
 
(151
)
 
23

 
—

 
(366
)
Other comprehensive loss of subsidiaries
 
—

 
—

 
(389
)
 
389

 
—

Other comprehensive loss
 
(238
)
 
(151
)
 
(366
)
 
389

 
(366
)
Comprehensive income (loss)
 
$
220

 
$
(31
)
 
$
158

 
$
(189
)
 
$
158

 



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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
For the six months ended June 30, 2019
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Net income
 
$
1,137

 
$
292

 
$
1,353

 
$
(1,429
)
 
$
1,353

Other comprehensive income:
 
 

 
 

 
 

 
 

 
 

Changes in net unrealized gains on investment securities:
 
 

 
 

 
 

 
 

 
 

Having no credit losses recognized in the consolidated statement of income
 
1,765

 
756

 
3

 
—

 
2,524

Having credit losses recognized in the consolidated statement of income
 
1

 
—

 
—

 
—

 
1

Net changes in benefit plan assets and obligations
 
—

 
—

 
26

 
—

 
26

Net changes in unrealized foreign currency translation
 
42

 
13

 
—

 
—

 
55

Other comprehensive income before income taxes and other comprehensive income of subsidiaries
 
1,808

 
769

 
29

 
—

 
2,606

Income tax expense
 
375

 
160

 
6

 
—

 
541

Other comprehensive income, net of taxes, before other comprehensive income of subsidiaries
 
1,433

 
609

 
23

 
—

 
2,065

Other comprehensive income of subsidiaries
 
—

 
—

 
2,042

 
(2,042
)
 
—

Other comprehensive income
 
1,433

 
609

 
2,065

 
(2,042
)
 
2,065

Comprehensive income
 
$
2,570

 
$
901

 
$
3,418

 
$
(3,471
)
 
$
3,418

 

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
For the six months ended June 30, 2018
 
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Net income
 
$
1,009

 
$
288

 
$
1,193

 
$
(1,297
)
 
$
1,193

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

 
 

Changes in net unrealized gains (losses) on investment securities:
 
 

 
 

 
 

 
 

 
 

Having no credit losses recognized in the consolidated statement of income
 
(1,047
)
 
(453
)
 
(1
)
 
—

 
(1,501
)
Having credit losses recognized in the consolidated statement of income
 
(11
)
 
(3
)
 
—

 
—

 
(14
)
Net changes in benefit plan assets and obligations
 
—

 
—

 
43

 
—

 
43

Net changes in unrealized foreign currency translation
 
(102
)
 
(50
)
 
—

 
—

 
(152
)
Other comprehensive income (loss) before income taxes and other comprehensive loss of subsidiaries
 
(1,160
)
 
(506
)
 
42

 
—

 
(1,624
)
Income tax expense (benefit)
 
(233
)
 
(98
)
 
6

 
—

 
(325
)
Other comprehensive income (loss), net of taxes, before other comprehensive loss of subsidiaries
 
(927
)
 
(408
)
 
36

 
—

 
(1,299
)
Other comprehensive loss of subsidiaries
 
—

 
—

 
(1,335
)
 
1,335

 
—

Other comprehensive loss
 
(927
)
 
(408
)
 
(1,299
)
 
1,335

 
(1,299
)
Comprehensive income (loss)
 
$
82

 
$
(120
)
 
$
(106
)
 
$
38

 
$
(106
)


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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING BALANCE SHEET (Unaudited)
At June 30, 2019
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Fixed maturities, available for sale, at fair value (amortized cost $64,784)
 
$
46,480

 
$
20,604

 
$
88

 
$
—

 
$
67,172

Equity securities, at fair value (cost $373)
 
105

 
106

 
195

 
—

 
406

Real estate investments
 
2

 
963

 
—

 
—

 
965

Short-term securities
 
1,439

 
633

 
1,415

 
—

 
3,487

Other investments
 
2,688

 
777

 
1

 
—

 
3,466

Total investments
 
50,714

 
23,083

 
1,699

 
—

 
75,496

Cash
 
198

 
218

 
—

 
—

 
416

Investment income accrued
 
430

 
183

 
2

 
—

 
615

Premiums receivable
 
5,587

 
2,710

 
—

 
—

 
8,297

Reinsurance recoverables
 
6,472

 
1,762

 
—

 
—

 
8,234

Ceded unearned premiums
 
742

 
122

 
—

 
—

 
864

Deferred acquisition costs
 
2,087

 
194

 
—

 
—

 
2,281

Contractholder receivables
 
4,766

 
10

 
—

 
—

 
4,776

Goodwill
 
2,582

 
1,370

 
—

 
(9
)
 
3,943

Other intangible assets
 
220

 
115

 
—

 
—

 
335

Investment in subsidiaries
 
—

 
—

 
29,342

 
(29,342
)
 
—

Other assets
 
2,472

 
158

 
685

 
—

 
3,315

Total assets
 
$
76,270

 
$
29,925

 
$
31,728

 
$
(29,351
)
 
$
108,572

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expense reserves
 
$
35,055

 
$
16,018

 
$
—

 
$
—

 
$
51,073

Unearned premium reserves
 
10,116

 
4,422

 
—

 
—

 
14,538

Contractholder payables
 
4,766

 
10

 
—

 
—

 
4,776

Payables for reinsurance premiums
 
340

 
251

 
—

 
—

 
591

Deferred taxes
 
234

 
(179
)
 
32

 
—

 
87

Debt
 
693

 
—

 
5,865

 
—

 
6,558

Other liabilities
 
4,224

 
902

 
502

 
—

 
5,628

Total liabilities
 
55,428

 
21,424

 
6,399

 
—

 
83,251

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Common stock (1,750.0 shares authorized; 260.4 shares issued and 260.3 shares outstanding)
 
—

 
484

 
23,372

 
(484
)
 
23,372

Additional paid-in capital
 
11,634

 
7,046

 
—

 
(18,680
)
 
—

Retained earnings
 
8,336

 
808

 
36,143

 
(9,152
)
 
36,135

Accumulated other comprehensive income
 
872

 
163

 
206

 
(1,035
)
 
206

Treasury stock, at cost (516.7 shares)
 
—

 
—

 
(34,392
)
 
—

 
(34,392
)
Total shareholders’ equity
 
20,842

 
8,501

 
25,329

 
(29,351
)
 
25,321

Total liabilities and shareholders’ equity
 
$
76,270

 
$
29,925

 
$
31,728

 
$
(29,351
)
 
$
108,572




37
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2018
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Assets
 
 

 
 

 
 

 
 

 
 

Fixed maturities, available for sale, at fair value (amortized cost $63,601)
 
$
43,683

 
$
19,697

 
$
84

 
$
—

 
$
63,464

Equity securities, available for sale, at fair value (cost $382)
 
105

 
92

 
171

 
—

 
368

Real estate investments
 
2

 
902

 
—

 
—

 
904

Short-term securities
 
1,855

 
759

 
1,371

 
—

 
3,985

Other investments
 
2,746

 
810

 
1

 
—

 
3,557

Total investments
 
48,391

 
22,260

 
1,627

 
—

 
72,278

Cash
 
181

 
192

 
—

 
—

 
373

Investment income accrued
 
434

 
187

 
3

 
—

 
624

Premiums receivable
 
5,089

 
2,417

 
—

 
—

 
7,506

Reinsurance recoverables
 
5,904

 
2,466

 
—

 
—

 
8,370

Ceded unearned premiums
 
522

 
56

 
—

 
—

 
578

Deferred acquisition costs
 
1,930

 
190

 
—

 
—

 
2,120

Deferred taxes
 
167

 
302

 
(24
)
 
—

 
445

Contractholder receivables
 
3,867

 
918

 
—

 
—

 
4,785

Goodwill
 
2,578

 
1,368

 
—

 
(9
)
 
3,937

Other intangible assets
 
224

 
121

 
—

 
—

 
345

Investment in subsidiaries
 
—

 
—

 
26,993

 
(26,993
)
 
—

Other assets
 
2,220

 
15

 
669

 
(32
)
 
2,872

Total assets
 
$
71,507

 
$
30,492

 
$
29,268

 
$
(27,034
)
 
$
104,233

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Claims and claim adjustment expense reserves
 
$
34,093

 
$
16,575

 
$
—

 
$
—

 
$
50,668

Unearned premium reserves
 
9,414

 
4,141

 
—

 
—

 
13,555

Contractholder payables
 
3,867

 
918

 
—

 
—

 
4,785

Payables for reinsurance premiums
 
169

 
120

 
—

 
—

 
289

Debt
 
693

 
32

 
5,871

 
(32
)
 
6,564

Other liabilities
 
4,133

 
849

 
496

 
—

 
5,478

Total liabilities
 
52,369

 
22,635

 
6,367

 
(32
)
 
81,339

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 

 
 

 
 

 
 

 
 

Common stock (1,750.0 shares authorized; 263.7 shares issued and 263.6 shares outstanding)
 
—

 
401

 
23,144

 
(401
)
 
23,144

Additional paid-in capital
 
11,634

 
7,023

 
—

 
(18,657
)
 
—

Retained earnings
 
8,065

 
879

 
35,211

 
(8,951
)
 
35,204

Accumulated other comprehensive loss
 
(561
)
 
(446
)
 
(1,859
)
 
1,007

 
(1,859
)
Treasury stock, at cost (510.9 shares)
 
—

 
—

 
(33,595
)
 
—

 
(33,595
)
Total shareholders’ equity
 
19,138

 
7,857

 
22,901

 
(27,002
)
 
22,894

Total liabilities and shareholders’ equity
 
$
71,507

 
$
30,492

 
$
29,268

 
$
(27,034
)
 
$
104,233





38
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30, 2019
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,137

 
$
292

 
$
1,353

 
$
(1,429
)
 
$
1,353

Net adjustments to reconcile net income to net cash provided by operating activities
 
314

 
213

 
(256
)
 
168

 
439

Net cash provided by operating activities
 
1,451

 
505

 
1,097

 
(1,261
)
 
1,792

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Proceeds from maturities of fixed maturities
 
2,106

 
924

 
8

 
—

 
3,038

Proceeds from sales of investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
968

 
526

 
1

 
—

 
1,495

Equity securities
 
33

 
38

 
—

 
—

 
71

Other investments
 
201

 
39

 
—

 
—

 
240

Purchases of investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
(4,049
)
 
(1,650
)
 
(9
)
 
—

 
(5,708
)
Equity securities
 
(1
)
 
(37
)
 
(3
)
 
—

 
(41
)
Real estate investments
 
—

 
(85
)
 
—

 
—

 
(85
)
Other investments
 
(234
)
 
(28
)
 
—

 
—

 
(262
)
Net sales (purchases) of short-term securities
 
416

 
125

 
(44
)
 
—

 
497

Securities transactions in course of settlement
 
157

 
66

 
—

 
—

 
223

Other
 
(166
)
 
(3
)
 
—

 
—

 
(169
)
Net cash used in investing activities
 
(569
)
 
(85
)
 
(47
)
 
—

 
(701
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Treasury stock acquired — share repurchase authorization
 
—

 
—

 
(750
)
 
—

 
(750
)
Treasury stock acquired — net employee share-based compensation
 
—

 
—

 
(47
)
 
—

 
(47
)
Dividends paid to shareholders
 
—

 
—

 
(419
)
 
—

 
(419
)
Payment of debt
 
—

 
(32
)
 
(500
)
 
32

 
(500
)
Issuance of debt
 
—

 
—

 
492

 
—

 
492

Issuance of common stock — employee share options
 
—

 
—

 
174

 
—

 
174

Dividends paid to parent company
 
(866
)
 
(363
)
 
—

 
1,229

 
—

Net cash used in financing activities
 
(866
)
 
(395
)
 
(1,050
)
 
1,261

 
(1,050
)
Effect of exchange rate changes on cash
 
1

 
1

 
—

 
—

 
2

Net increase in cash
 
17

 
26

 
—

 
—

 
43

Cash at beginning of year
 
181

 
192

 
—

 
—

 
373

Cash at end of period
 
$
198

 
$
218

 
$
—

 
$
—

 
$
416

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
244

 
$
91

 
$
(10
)
 
$
—

 
$
325

Interest paid
 
$
24

 
$
—

 
$
147

 
$
—

 
$
171





39
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), Continued
15.
CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES, Continued

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For the six months ended June 30, 2018
(in millions)
 
TPC
 
Other
Subsidiaries
 
TRV
 
Eliminations
 
Consolidated
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
Net income
 
$
1,009

 
$
288

 
$
1,193

 
$
(1,297
)
 
$
1,193

Net adjustments to reconcile net income to net cash provided by operating activities
 
323

 
11

 
146

 
25

 
505

Net cash provided by operating activities
 
1,332

 
299

 
1,339

 
(1,272
)
 
1,698

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
Proceeds from maturities of fixed maturities
 
2,730

 
914

 
13

 
—

 
3,657

Proceeds from sales of investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
1,847

 
759

 
1

 
—

 
2,607

Equity securities
 
33

 
59

 
—

 
—

 
92

Other investments
 
133

 
56

 
—

 
—

 
189

Purchases of investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
(5,762
)
 
(2,173
)
 
(17
)
 
—

 
(7,952
)
Equity securities
 
(2
)
 
(56
)
 
(2
)
 
—

 
(60
)
Real estate investments
 
—

 
(44
)
 
—

 
—

 
(44
)
Other investments
 
(232
)
 
(43
)
 
—

 
—

 
(275
)
Net sales (purchases) of short-term securities
 
986

 
383

 
(167
)
 
—

 
1,202

Securities transactions in course of settlement
 
268

 
12

 
(1
)
 
—

 
279

Other
 
(148
)
 
(4
)
 
—

 
—

 
(152
)
Net cash used in investing activities
 
(147
)
 
(137
)
 
(173
)
 
—

 
(457
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
Treasury stock acquired — share repurchase authorization
 
—

 
—

 
(700
)
 
—

 
(700
)
Treasury stock acquired — net employee share-based compensation
 
—

 
—

 
(51
)
 
—

 
(51
)
Dividends paid to shareholders
 
—

 
—

 
(404
)
 
—

 
(404
)
Payment of debt
 
—

 
—

 
(600
)
 
—

 
(600
)
Issuance of debt
 
—

 
7

 
491

 
(7
)
 
491

Issuance of common stock — employee share options
 
—

 
—

 
98

 
—

 
98

Dividends paid to parent company
 
(1,109
)
 
(170
)
 
—

 
1,279

 
—

Net cash used in financing activities
 
(1,109
)
 
(163
)
 
(1,166
)
 
1,272

 
(1,166
)
Effect of exchange rate changes on cash
 
(2
)
 
(2
)
 
—

 
—

 
(4
)
Net increase (decrease) in cash
 
74

 
(3
)
 
—

 
—

 
71

Cash at beginning of year
 
157

 
187

 
—

 
—

 
344

Cash at end of period
 
$
231

 
$
184

 
$
—

 
$
—

 
$
415

Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
 
 
 
Income taxes paid (received)
 
$
193

 
$
171

 
$
(126
)
 
$
—

 
$
238

Interest paid
 
$
24

 
$
—

 
$
151

 
$
—

 
$
175



40
Table of Contents

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
Item 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following is a discussion and analysis of the Company’s financial condition and results of operations.
 
FINANCIAL HIGHLIGHTS
 
2019 Second Quarter Consolidated Results of Operations
 
•
Net income of $557 million, or $2.11 per share basic and $2.10 per share diluted
•
Net earned premiums of $6.99 billion
•
Catastrophe losses of $367 million ($290 million after-tax)
•
Net favorable prior year reserve development of $123 million ($99 million after-tax)
•
Combined ratio of 98.4%
•
Net investment income of $648 million ($548 million after-tax)
•
Operating cash flows of $1.15 billion
 
2019 Second Quarter Consolidated Financial Condition
 
•
Total investments of $75.50 billion; fixed maturities and short-term securities comprised 94% of total investments
•
Total assets of $108.57 billion
•
Total debt of $6.56 billion, resulting in a debt-to-total capital ratio of 20.6% (21.9% excluding net unrealized investment gains, net of tax)
•
Repurchased 2.6 million common shares for total cost of $376 million and paid $214 million of dividends to shareholders
•
Shareholders’ equity of $25.32 billion
•
Net unrealized investment gains of $2.39 billion ($1.88 billion after-tax)
•
Book value per common share of $97.26
•
Holding company liquidity of $1.46 billion

 

41
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


CONSOLIDATED OVERVIEW
 
Consolidated Results of Operations
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions, except ratio and per share amounts)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenues
 
 

 
 

 
 

 
 

Premiums
 
$
6,988

 
$
6,695

 
$
13,843

 
$
13,232

Net investment income
 
648

 
595

 
1,230

 
1,198

Fee income
 
116

 
112

 
225

 
215

Net realized investment gains
 
25

 
36

 
78

 
25

Other revenues
 
57

 
39

 
129

 
93

Total revenues
 
7,834

 
7,477

 
15,505

 
14,763

 
 
 
 
 
 
 
 
 
Claims and expenses
 
 

 
 

 
 

 
 

Claims and claim adjustment expenses
 
4,821

 
4,562

 
9,263

 
8,858

Amortization of deferred acquisition costs
 
1,134

 
1,081

 
2,251

 
2,142

General and administrative expenses
 
1,125

 
1,113

 
2,182

 
2,175

Interest expense
 
89

 
90

 
177

 
179

Total claims and expenses
 
7,169

 
6,846

 
13,873

 
13,354

Income before income taxes
 
665

 
631

 
1,632

 
1,409

Income tax expense
 
108

 
107

 
279

 
216

Net income
 
$
557

 
$
524

 
$
1,353

 
$
1,193

 
 
 
 
 
 
 
 
 
Net income per share
 
 

 
 

 
 

 
 

Basic
 
$
2.11

 
$
1.93

 
$
5.12

 
$
4.39

Diluted
 
$
2.10

 
$
1.92

 
$
5.08

 
$
4.35

 
 
 
 
 
 
 
 
 
Combined ratio
 
 

 
 

 
 

 
 

Loss and loss adjustment expense ratio
 
68.2
%
 
67.4
%
 
66.2
%
 
66.2
%
Underwriting expense ratio
 
30.2

 
30.7

 
29.9

 
30.6

Combined ratio
 
98.4
%
 
98.1
%
 
96.1
%
 
96.8
%
 
The following discussions of the Company’s net income and segment income are presented on an after-tax basis.  Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted.  Discussions of net income per common share are presented on a diluted basis.
 
Overview
Diluted net income per share of $2.10 in the second quarter of 2019 increased by 9% over diluted net income per share of $1.92 in the same period of 2018.  Net income of $557 million in the second quarter of 2019 increased by 6% over net income of $524 million in the same period of 2018.  The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods.  The increase in income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses and (ii) higher net investment income, partially offset by (iii) lower underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") and (iv) lower net favorable prior year reserve development. Catastrophe losses in the second quarters of 2019 and 2018 were $367 million and $488 million, respectively.  Net favorable prior year reserve development in the second quarters of 2019 and 2018 was $123 million and $186 million, respectively.  Underlying underwriting margins in the second quarter of 2019 were lower in both Personal Insurance and Business Insurance and were slightly higher in Bond & Specialty Insurance compared to the same period of 2018. Income tax expense in the second quarter of 2019 was slightly higher than in the same period of 2018, reflecting the impact of the increase in income before income taxes in the second quarter of 2019, largely offset by a higher tax benefit in the second quarter of 2019 related to employee equity compensation plans.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued



Diluted net income per share of $5.08 in the first six months of 2019 increased by 17% over diluted net income per share of $4.35 in the same period of 2018.  Net income of $1.35 billion in the first six months of 2019 increased by 13% over net income of $1.19 billion in the same period of 2018.  The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses, (ii) higher net realized investment gains and (iii) higher net investment income, partially offset by (iv) lower net favorable prior year reserve development. Catastrophe losses in the first six months of 2019 and 2018 were $560 million and $842 million, respectively.  Net favorable prior year reserve development in the first six months of 2019 and 2018 was $174 million and $336 million, respectively. Income tax expense in the first six months of 2019 was higher than in the same period of 2018, reflecting the impacts of the increase in income before income taxes in the first six months of 2019 and lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions (unrecognized tax benefits).

The Company has insurance operations in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s, as well as in Brazil and Colombia, primarily through joint ventures.  Because these operations are conducted in local currencies other than the U.S. dollar, the Company is subject to changes in foreign currency exchange rates.  For the three months and six months ended June 30, 2019 and 2018, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts.  The impact of these changes was not material to the Company’s net income or segment income for the periods reported.
 
Revenues
 
Earned Premiums
Earned premiums in the second quarter of 2019 were $6.99 billion, $293 million or 4% higher than in the same period of 2018.  Earned premiums in the first six months of 2019 were $13.84 billion, $611 million or 5% higher than in the same period of 2018. In Business Insurance, earned premiums in both the second quarter and first six months of 2019 increased by 4% over the same periods of 2018.  In Bond & Specialty Insurance, earned premiums in both the second quarter and first six months of 2019 increased by 5% over the same periods of 2018.  In Personal Insurance, earned premiums in both the second quarter and first six months of 2019 increased by 5% over the same periods of 2018.  Factors contributing to the increases 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 Company’s investments.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
Average investments (1)
 
$
74,370

 
$
72,618

 
$
74,197

 
$
72,569

Pre-tax net investment income
 
648

 
595

 
1,230

 
1,198

After-tax net investment income
 
548

 
507

 
1,044

 
1,020

Average pre-tax yield (2)
 
3.5
%
 
3.3
%
 
3.3
%
 
3.3
%
Average after-tax yield (2)
 
2.9
%
 
2.8
%
 
2.8
%
 
2.8
%
_________________________________________________________ 
(1)
Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.
(2)
Excludes net realized and net unrealized investment gains and losses.
 
Net investment income in the second quarter of 2019 was $648 million, $53 million or 9% higher than in the same period of 2018.  Net investment income in the first six months of 2019 was $1.23 billion, $32 million or 3% higher than in the same period of 2018. Net investment income from fixed maturity investments in the second quarter and first six months of 2019 was $514 million and $1.03 billion, respectively, $25 million and $55 million higher, respectively, than in the same periods of 2018. The increases in both periods of 2019 primarily resulted from higher long-term reinvestment rates available in the market and a higher average level of fixed maturity investments. Net investment income from short-term securities in the second quarter and first six months of 2019 was $27 million and $55 million, respectively, $6 million and $15 million higher, respectively, than in the same periods of 2018. The increases primarily resulted from higher short-term interest rates. Net investment income generated by the Company's remaining investment portfolios in the second quarter of 2019 was $118 million, $24 million higher than in the same period of

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


2018, primarily resulting from higher returns from private equity limited partnerships. Net investment income generated by the Company's remaining investment portfolios in the first six months of 2019 was $171 million, $36 million lower than in the same period of 2018, primarily resulting from lower returns from private equity limited partnerships and real estate partnerships.

Fee Income
Fee income in the second quarter and first six months of 2019 was $116 million and $225 million, respectively, $4 million and $10 million higher, respectively, than in the same periods of 2018. The National Accounts market in Business Insurance is the primary source of the Company’s fee-based business and is discussed in the Business Insurance segment discussion that follows. 
 
Net Realized Investment Gains
The following table sets forth information regarding the Company’s net realized investment gains.
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Other-than-temporary impairment losses
 
$
(1
)
 
$
(1
)
 
$
(2
)
 
$
(1
)
Net realized investment gains on equity securities still held
 
6

 
16

 
45

 
3

Other net realized investment gains, including from sales
 
20

 
21

 
35

 
23

Total
 
$
25

 
$
36

 
$
78

 
$
25

 
Other Revenues
Other revenues in the second quarters and first six months of 2019 and 2018 included installment premium charges and revenues from Simply Business.
 
Claims and Expenses

Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2019 were $4.82 billion, $259 million or 6% higher than in the same period of 2018, primarily reflecting the impacts of (i) higher business volumes, (ii) higher non-catastrophe weather-related losses, (iii) loss cost trends, (iv) lower net favorable prior year reserve development, (v) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019, partially offset by (vi) lower catastrophe losses and (vii) a lower level of domestic large losses, primarily fire-related.  Catastrophe losses in the second quarter of 2019 primarily resulted from wind storms in several regions of the United States. Catastrophe losses in the second quarter of 2018 primarily resulted from wind and hail storms in several regions of the United States.

Claims and claim adjustment expenses in the first six months of 2019 were $9.26 billion, $405 million or 5% higher than in the same period of 2018, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, (iii) lower net favorable prior year reserve development, (iv) higher non-catastrophe weather-related losses, (v) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line and (vi) a small number of large losses in the International business in the first quarter of 2019, partially offset by (vii) lower catastrophe losses and (viii) a lower level of domestic large losses, primarily fire-related. Catastrophe losses in the first six months of 2019 and 2018 included the second quarter events described above, as well as winter storms and wind storms in several regions of the United States in the first quarter of 2019, and winter storms in the eastern United States, a wind and hail storm in the southern United States and mudslides in California in the first quarter of 2018.

Factors contributing to net favorable prior year reserve development during the second quarters and first six months of 2019 and 2018 are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.


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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


Significant Catastrophe Losses
The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in the three months and six months ended June 30, 2019 and 2018, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and six months ended June 30, 2019 and 2018 for significant catastrophes that occurred in 2018 and 2017, and the estimate of ultimate losses for those catastrophes at June 30, 2019 and December 31, 2018.  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.  The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for 2019 ranged from approximately $19 million to $30 million of losses before reinsurance and taxes. For the Company’s definition of a catastrophe, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— Consolidated Overview” in the Company’s 2018 Annual Report.
 
 
Losses Incurred/Unfavorable (Favorable)
Prior Year Reserve Development
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
 
Estimated Ultimate Losses
(in millions, pre-tax and net of reinsurance)
2019
 
2018
 
2019
 
2018
June 30,
2019
 
December 31, 2018
 
 
 
 
 
 
'

 
 
 
 
 
 
2017
 
 

 
 

 
 

 
 

 
 

 
 

PCS Serial Number:
 
 

 
 

 
 

 
 

 
 

 
 

22 — Severe wind and hail storms
 
(1
)
 
(2
)
 
(2
)
 
(2
)
 
107

 
109

32 — Severe wind and hail storms
 
1

 
19

 
1

 
20

 
230

 
229

43 — Hurricane Harvey
 
(3
)
 
(5
)
 
(14
)
 
(25
)
 
216

 
230

44 — Hurricane Irma
 
1

 
(8
)
 
(8
)
 
(19
)
 
151

 
159

48 — California wildfire — Tubbs fire
 
(9
)
 
—

 
(6
)
 
4

 
502

 
508

 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 

 
 

 
 

 
 

 
 

 
 

PCS Serial Number:
 
 

 
 

 
 

 
 

 
 

 
 

15 — Winter storm
 
(4
)
 
3

 
(4
)
 
138

 
140

 
144

17 — Severe wind and hail storms
 
(1
)
 
11

 
(3
)
 
121

 
108

 
111

33 — Severe wind and hail storms
 
3

 
n/a

 
(2
)
 
n/a

 
115

 
117

52 — Hurricane Florence
 
(7
)
 
n/a

 
(10
)
 
n/a

 
96

 
106

57 — Hurricane Michael
 
3

 
n/a

 
6

 
n/a

 
164

 
158

59 — California wildfire - Camp fire
 
—

 
n/a

 
(2
)
 
n/a

 
332

 
334

60 — California wildfire - Woolsey fire
 
9

 
n/a

 
9

 
n/a

 
128

 
119

 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
PCS Serial Number:
 
 
 
 
 
 
 
 
 
 
 
 
33 — Severe wind storms
 
185

 
n/a

 
185

 
n/a

 
185

 
n/a

_________________________________________________________
n/a: not applicable.


45
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2019 was $1.13 billion, $53 million or 5% higher than in the same period of 2018.  Amortization of deferred acquisition costs in the first six months of 2019 was $2.25 billion, $109 million or 5% higher than in the same period of 2018. 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 2019 were $1.13 billion, $12 million or 1% higher than in the same period of 2018. General and administrative expenses in the first six months of 2019 were $2.18 billion, comparable with the same period of 2018. 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 2019 was $89 million and $177 million, respectively, compared with $90 million and $179 million, respectively, in the same periods of 2018.
 
Income Tax Expense
Income tax expense in the second quarter of 2019 was $108 million, $1 million or 1% higher than in the same period of 2018, primarily reflecting the impact of the $34 million increase in income before income taxes in the second quarter of 2019, largely offset by a higher tax benefit in the second quarter of 2019 related to employee equity compensation plans. Income tax expense in the first six months of 2019 was $279 million, $63 million or 29% higher than in the same period of 2018, primarily reflecting the impacts of the $223 million increase in income before income taxes in the first six months of 2019 and lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions.
 
The Company’s effective tax rate was 16% and 17% in the second quarters of 2019 and 2018, respectively.  The Company's effective tax rate was 17% and 15% in the first six months of 2019 and 2018, respectively. The effective tax rates were lower than the statutory rate of 21% in both periods, primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision.

Combined Ratio
 
The combined ratio of 98.4% in the second quarter of 2019 was 0.3 points higher than the combined ratio of 98.1% in the same period of 2018.  The loss and loss adjustment expense ratio of 68.2% in the second quarter of 2019 was 0.8 points higher than the loss and loss adjustment expense ratio of 67.4% in the same period of 2018.  The underwriting expense ratio of 30.2% for the second quarter of 2019 was 0.5 points lower than the underwriting expense ratio of 30.7% in the same period of 2018. 
 
Catastrophe losses in the second quarters of 2019 and 2018 accounted for 5.3 points and 7.3 points, respectively, of the combined ratio.  Net favorable prior year reserve development in the second quarters of 2019 and 2018 provided 1.8 points and 2.8 points of benefit, respectively, to the combined ratio.  The combined ratio excluding prior year reserve development and catastrophe losses (“underlying combined ratio”) in the second quarter of 2019 was 1.3 points higher than the 2018 ratio on the same basis, primarily reflecting the impact of (i) higher non-catastrophe weather-related losses, (ii) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019 and (iii) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty, partially offset by (iv) a lower level of domestic large losses, primarily fire-related, (v) earned pricing that exceeded loss cost trends in Agency Automobile and (vi) a lower underwriting expense ratio.

The combined ratio of 96.1% in the first six months of 2019 was 0.7 points lower than the combined ratio of 96.8% in the same period of 2018. The loss and loss adjustment expense ratio was 66.2% for the first six months of both 2019 and 2018.  The underwriting expense ratio of 29.9% for the first six months of 2019 was 0.7 points lower than the underwriting expense ratio of 30.6% in the same period of 2018.

Catastrophe losses in the first six months of 2019 and 2018 accounted for 4.1 points and 6.3 points, respectively, of the combined ratio.  Net favorable prior year reserve development in the first six months of 2019 and 2018 provided 1.3 points and 2.5 points of benefit, respectively, to the combined ratio.  The underlying combined ratio in the first six months of 2019 was 0.3 points higher than the 2018 ratio on the same basis.

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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued



Written Premiums
Consolidated gross and net written premiums were as follows:
 
 
Gross Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Business Insurance
 
$
4,193

 
$
4,038

 
$
8,923

 
$
8,509

Bond & Specialty Insurance
 
747

 
674

 
1,409

 
1,312

Personal Insurance
 
2,884

 
2,717

 
5,331

 
5,026

Total
 
$
7,824

 
$
7,429

 
$
15,663

 
$
14,847

 
 
 
Net Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Business Insurance
 
$
3,874

 
$
3,781

 
$
8,037

 
$
7,775

Bond & Specialty Insurance
 
710

 
653

 
1,297

 
1,227

Personal Insurance
 
2,866

 
2,697

 
5,173

 
4,953

Total
 
$
7,450

 
$
7,131

 
$
14,507

 
$
13,955

 
Gross and net written premiums in second quarter and first six months of 2019 reflected growth in all segments. Gross written premiums in both the second quarter and first six months of 2019 increased by 5% over the same periods of 2018. Net written premiums in both the second quarter and first six months of 2019 increased by 4% over the same periods of 2018. Net written premium growth in the first six months of 2019 was impacted by ceded written premiums related to the new catastrophe reinsurance treaty entered into in the first quarter of 2019. Factors contributing to the increases in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.


47
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


RESULTS OF OPERATIONS BY SEGMENT
 
Business Insurance

Results of Business Insurance were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenues
 
 

 
 

 
 

 
 

Earned premiums
 
$
3,783

 
$
3,641

 
$
7,525

 
$
7,209

Net investment income
 
481

 
440

 
908

 
886

Fee income
 
111

 
107

 
215

 
206

Other revenues
 
30

 
20

 
73

 
51

Total revenues
 
4,405

 
4,208

 
8,721

 
8,352

 
 
 
 
 
 
 
 
 
Total claims and expenses
 
3,990

 
3,746

 
7,817

 
7,368

 
 
 
 
 
 
 
 
 
Segment income before income taxes
 
415

 
462

 
904

 
984

Income tax expense
 
64

 
77

 
139

 
147

Segment income
 
$
351

 
$
385

 
$
765

 
$
837

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
 
69.6
%
 
66.9
%
 
68.6
%
 
66.3
%
Underwriting expense ratio
 
31.5

 
31.9

 
31.0

 
31.9

Combined ratio
 
101.1
%
 
98.8
%
 
99.6
%
 
98.2
%

Overview
Segment income in the second quarter of 2019 was $351 million, $34 million or 9% lower than segment income of $385 million in the same period of 2018. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher catastrophe losses, (ii) lower underlying underwriting margins and (iii) lower net favorable prior year reserve development, partially offset by (iv) higher net investment income. Catastrophe losses in the second quarters of 2019 and 2018 were $211 million and $168 million, respectively.  Net favorable prior year reserve development in the second quarters of 2019 and 2018 was $71 million and $84 million, respectively. The lower underlying underwriting margins primarily reflected the impacts of (i) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019, (ii) higher non-catastrophe weather-related losses and (iii) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty, partially offset by (iv) a lower level of domestic large losses, primarily fire-related and (v) higher business volumes. Income tax expense in the second quarter of 2019 was lower than in the same period of 2018, primarily reflecting the impact of the decrease in segment income before income taxes in the second quarter of 2019.

Segment income in the first six months of 2019 was $765 million, $72 million or 9% lower than segment income of $837 million in the same period of 2018. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower net favorable prior year reserve development, partially offset by (ii) higher net investment income. Catastrophe losses in the first six months of both 2019 and 2018 were $306 million.  Net favorable prior year reserve development in the first six months of 2019 and 2018 was $50 million and $150 million, respectively. Income tax expense in the first six months of 2019 was lower than in the same period of 2018, primarily reflecting the impacts of (i) the decrease in segment income before income taxes in the first six months of 2019, partially offset by (ii) lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions.


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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


Revenues
 
Earned Premiums
Earned premiums in the second quarter of 2019 were $3.78 billion, $142 million or 4% higher than in the same period of 2018. Earned premiums in the first six months of 2019 were $7.53 billion, $316 million or 4% higher than in the same period of 2018. The increase in 2019 primarily reflected the increase in net written premiums over the preceding twelve months. The increases in earned premiums in both periods of 2019 were reduced by the earned impact of the new catastrophe reinsurance treaty.

Net Investment Income
Net investment income in the second quarter of 2019 was $481 million, $41 million or 9% higher than in the same period of 2018.   Net investment income in the first six months of 2019 was $908 million, $22 million or 2% higher than in the same period of 2018. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the increases in the Company’s consolidated net investment income in the second quarter and first six months of 2019 compared with the same periods of 2018.  In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for a discussion of the Company’s net investment income allocation methodology.
 
Fee Income
National Accounts is the primary source of fee income due to revenue from its large deductible policies and service businesses, which include risk management, claims administration, loss control and risk management information services provided to third parties, as well as claims and policy management services to workers' compensation residual market pools.  Fee income in the second quarter of 2019 was $111 million, $4 million or 4% higher than in the same period of 2018. Fee income in the first six months of 2019 was $215 million, $9 million or 4% higher than in the same period of 2018. The increases in both periods of 2019 reflected higher claim volume under administration associated with its service businesses.
 
Other Revenues
Other revenues in the second quarters and first six months of both 2019 and 2018 included installment premium charges and other policyholder service charges, as well as revenues from Simply Business.  Other revenues in the second quarter of 2019 were $30 million, $10 million or 50% higher than in the same period of 2018. Other revenues in the first six months of 2019 were $73 million, $22 million or 43% higher than in the same period of 2018. The increases in both periods of 2019 primarily resulted from Simply Business revenue growth.
 
Claims and Expenses
 
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2019 were $2.69 billion, $202 million or 8% higher than in the same period of 2018, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, (iii) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019, (iv) higher catastrophe losses, (v) higher non-catastrophe weather-related losses and (vi) lower net favorable prior year reserve development, partially offset by (vii) a lower level of domestic large losses, primarily fire-related.

Claims and claim adjustment expenses in the first six months of 2019 were $5.27 billion, $390 million or 8% higher than in the same period of 2018, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, (iii) lower net favorable prior year reserve development, (iv) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, (v) a small number of large losses in the International business in the first quarter of 2019 and (vi) higher non-catastrophe weather-related losses, partially offset by (vii) a lower level of domestic large losses, primarily fire-related.
 
Factors contributing to net prior year reserve development during the second quarters and first six months of 2019 and 2018 are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
 
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2019 was $618 million, $30 million or 5% higher than in the same period of 2018.  Amortization of deferred acquisition costs in the first six months of 2019 was $1.23 billion, $65 million or 6% higher than in the same period of 2018. The increases in both periods of 2019 were generally consistent with the increases in earned premiums.

49
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


 
General and Administrative Expenses
General and administrative expenses in the second quarter of 2019 were $686 million, $12 million or 2% higher than in the same period of 2018. General and administrative expenses in the first six months of 2019 were $1.32 billion, comparable with the same period of 2018.
 
Income Tax Expense
Income tax expense in the second quarter of 2019 was $64 million, $13 million, or 17% lower than in the same period of 2018, primarily reflecting the impact of the $47 million decrease in segment income before income taxes in the second quarter of 2019. Income tax in the first six months of 2019 was $139 million, $8 million or 5% lower than in the same period of 2018, primarily reflecting the impacts of (i) the $80 million decrease in segment income before income taxes, partially offset by (ii) lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions.

Combined Ratio
 
The combined ratio of 101.1% in the second quarter of 2019 was 2.3 points higher than the combined ratio of 98.8% in the same period of 2018.  The loss and loss adjustment expense ratio of 69.6% in the second quarter of 2019 was 2.7 points higher than the loss and loss adjustment expense ratio of 66.9% in the same period of 2018. The underwriting expense ratio of 31.5% for the second quarter of 2019 was 0.4 points lower than the underwriting expense ratio of 31.9% in the same period of 2018. 

Catastrophe losses in the second quarters of 2019 and 2018 accounted for 5.6 points and 4.6 points, respectively, of the combined ratio.  Net favorable prior year reserve development in the second quarters of 2019 and 2018 provided 1.9 points and 2.3 points benefit, respectively, to the combined ratio. The underlying combined ratio in the second quarter of 2019 was 0.9 points higher than the 2018 ratio on the same basis, primarily reflecting the impacts of (i) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019, (ii) higher non-catastrophe weather-related losses and (iii) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty, partially offset by (iv) a lower level of domestic large losses, primarily fire-related and (v) a lower underwriting expense ratio.

The combined ratio of 99.6% in the first six months of 2019 was 1.4 points higher than the combined ratio of 98.2% in the same period of 2018. The loss and loss adjustment expense ratio of 68.6% in the first six months of 2019 was 2.3 points higher than the loss and loss adjustment expense ratio of 66.3% in the same period of 2018.  The underwriting expense ratio of 31.0% for the first six months of 2019 was 0.9 points lower than the underwriting expense ratio of 31.9% in the same period of 2018.

Catastrophe losses in the first six months of 2019 and 2018 accounted for 4.1 points and 4.3 points, respectively, of the combined ratio. Net favorable prior year reserve development in the first six months of 2019 and 2018 provided 0.7 points and 2.1 points of benefit, respectively, to the combined ratio.  The underlying combined ratio in the first six months of 2019 was 0.2 points higher than the 2018 ratio on the same basis.
 
Written Premiums
Business Insurance’s gross and net written premiums by market were as follows:
 
 
Gross Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Domestic:
 
 

 
 

 
 

 
 

Select Accounts
 
$
759

 
$
731

 
$
1,572

 
$
1,513

Middle Market
 
2,139

 
2,076

 
4,675

 
4,435

National Accounts
 
327

 
340

 
834

 
861

National Property and Other
 
627

 
543

 
1,136

 
1,006

Total Domestic
 
3,852

 
3,690

 
8,217

 
7,815

International
 
341

 
348

 
706

 
694

Total Business Insurance
 
$
4,193

 
$
4,038

 
$
8,923

 
$
8,509


50
Table of Contents
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


 
 
 
Net Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Domestic:
 
 

 
 

 
 

 
 

Select Accounts
 
$
756

 
$
729

 
$
1,541

 
$
1,502

Middle Market
 
2,009

 
1,985

 
4,419

 
4,247

National Accounts
 
223

 
231

 
527

 
540

National Property and Other
 
588

 
518

 
975

 
898

Total Domestic
 
3,576

 
3,463

 
7,462

 
7,187

International
 
298

 
318

 
575

 
588

Total Business Insurance
 
$
3,874

 
$
3,781

 
$
8,037

 
$
7,775

 
Gross written premiums in the second quarter and first six months of 2019 increased by 4% and 5%, respectively, over the same periods of 2018. Net written premiums in the second quarter and first six months of 2019 increased by 2% and 3%, respectively, over the same periods of 2018. Net written premium growth in the first six months of 2019 was impacted by the Company's new catastrophe reinsurance treaty entered into in the first quarter of 2019.
 
Select Accounts.  Net written premiums of $756 million in the second quarter of 2019 increased by 4% over the same period of 2018. Net written premiums of $1.54 billion in the first six months of 2019 increased by 3% over the same period of 2018. Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive and were comparable with the same periods of 2018.  New business premiums in the second quarter and first six months of 2019 decreased slightly from the same periods of 2018.
 
Middle Market.  Net written premiums of $2.01 billion in the second quarter of 2019 increased by 1% over the same period of 2018.  Net written premiums of $4.42 billion in the first six months of 2019 increased by 4% over the same period of 2018. Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive and were higher than in the same periods of 2018.  New business premiums in the second quarter and first six months of 2019 decreased from the same periods of 2018.
 
National Accounts.  Net written premiums of $223 million in the second quarter of 2019 decreased by 3% from the same period of 2018.  Net written premiums of $527 million in the first six months of 2019 decreased by 2% from the same period of 2018. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 were slightly negative, compared with positive in the same periods of 2018. New business premiums in the second quarter of 2019 decreased from the same period of 2018. New business premiums in the first six months of 2019 increased slightly from the same period of 2018.
 
National Property and Other.  Net written premiums of $588 million in the second quarter of 2019 increased by 14% over the same period of 2018.  Net written premiums of $975 million in the first six months of 2019 increased by 9% over the same period of 2018. Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive and were higher than in the same periods of 2018. New business premiums in the second quarter and first six months of 2019 increased over the same periods of 2018.
 
International.  Net written premiums of $298 million in the second quarter of 2019 decreased by 6% from the same period of 2018. Net written premiums of $575 million in the first six months of 2019 decreased by 2% from the same period of 2018. The decreases in the second quarter and first six months of 2019 were primarily driven by the impact of changes in foreign currency exchange rates, as well as decreases in the Company's operations at Lloyd's.
 

51
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
 
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


Bond & Specialty Insurance
 
Results of Bond & Specialty Insurance were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenues
 
 

 
 

 
 

 
 

Earned premiums
 
$
632

 
$
601

 
$
1,238

 
$
1,183

Net investment income
 
58

 
57

 
114

 
115

Other revenues
 
6

 
5

 
12

 
11

Total revenues
 
696

 
663

 
1,364

 
1,309

 
 
 
 
 
 
 
 
 
Total claims and expenses
 
476

 
404

 
971

 
842

 
 
 
 
 
 
 
 
 
Segment income before income taxes
 
220

 
259

 
393

 
467

Income tax expense
 
46

 
55

 
81

 
90

Segment income
 
$
174

 
$
204

 
$
312

 
$
377

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
 
37.4
%
 
28.8
%
 
40.3
%
 
32.6
%
Underwriting expense ratio
 
37.5

 
37.7

 
37.6

 
37.9

Combined ratio
 
74.9
%
 
66.5
%
 
77.9
%
 
70.5
%
 
Overview
Segment income in the second quarter of 2019 was $174 million, $30 million or 15% lower than segment income of $204 million in the same period of 2018. The decrease in segment income before income taxes primarily reflected the pre-tax impact of lower net favorable prior year reserve development. Net favorable prior year reserve development in the second quarters of 2019 and 2018 was $39 million and $89 million, respectively.  No catastrophe losses were incurred in the second quarter of 2019, compared with $5 million in the same period of 2018.  Income tax expense in the second quarter of 2019 was lower than in the same period of 2018, primarily reflecting the impact of the decrease in segment income before income taxes in the second quarter of 2019.

Segment income in the first six months of 2019 was $312 million, $65 million or 17% lower than segment income of $377 million in the same period of 2018. The decrease in segment income before income taxes primarily reflected the pre-tax impact of lower net favorable prior year reserve development. Net favorable prior year reserve development in the first six months of 2019 and 2018 was $42 million and $124 million, respectively.  Catastrophe losses in the first six months of 2019 and 2018 were $3 million and $5 million, respectively.  Income tax expense in the first six months of 2019 was lower than in the same period of 2018, primarily reflecting the impact of the decrease in segment income before income taxes in the first six months of 2019, partially offset by the impact of lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions.

Revenues
 
Earned Premiums
Earned premiums in the second quarter of 2019 were $632 million, $31 million or 5% higher than in the same period of 2018. Earned premiums in the first six months of 2019 were $1.24 billion, $55 million or 5% higher than in the same period of 2018. The increases in both periods of 2019 primarily reflected the increase in net written premiums over the preceding twelve months.
 
Net Investment Income
Net investment income in the second quarter of 2019 was $58 million, $1 million or 2% higher than in the same period of 2018. Net investment income in the first six months of 2019 of was $114 million, $1 million or 1% lower than in the same period of 2018. Included in Bond & Specialty Insurance 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 increases in the Company’s consolidated net investment income in the second quarter and first six months of 2019 compared with the same periods of 2018.  In addition, refer

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to note 2 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for a discussion of the Company’s net investment income allocation methodology.
 
Claims and Expenses
 
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2019 were $238 million, $63 million or 36% higher than in the same period of 2018, primarily reflecting the impacts of (i) lower net favorable prior year reserve development and (ii) higher business volumes.

Claims and claim adjustment expenses in the first six months of 2019 were $504 million, $113 million or 29% higher than in the same period of 2018, primarily reflecting the impacts of (i) lower net favorable prior year reserve development and (ii) higher business volumes.

Factors contributing to net favorable prior year reserve development during the second quarter and first six months of 2019 and 2018 are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
 
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2019 was $118 million, $5 million or 4% higher than in the same period of 2018.  Amortization of deferred acquisition costs in the first six months of 2019 was $230 million, $10 million or 5% higher than in the same period of 2018. The increases in both periods of 2019 were generally consistent with the increases in earned premiums.

General and Administrative Expenses
General and administrative expenses in the second quarter of 2019 were $120 million, $4 million or 3% higher than in the same period of 2018. General and administrative expenses in the first six months of 2019 were $237 million, $6 million or 3% higher than in the same period of 2018. The increases in both periods of 2019 primarily reflected the impact of higher business volumes.
 
Income Tax Expense
Income tax expense in the second quarter of 2019 was $46 million, $9 million or 16% lower than in the same period of 2018, primarily reflecting the impact of the $39 million decrease in segment income before income taxes in the second quarter of 2019. Income tax expense in the first six months of 2019 was $81 million, $9 million or 10% lower than in the same period of 2018, primarily reflecting the impact of the $74 million decrease in segment income before income taxes in the first six months of 2019, partially offset by the impact of lower tax expense in the first six months of 2018 due to a reduction in the liability for uncertain tax positions.

Combined Ratio
 
The combined ratio of 74.9% in the second quarter of 2019 was 8.4 points higher than the combined ratio of 66.5% in the same period of 2018.  The loss and loss adjustment expense ratio of 37.4% in the second quarter of 2019 was 8.6 points higher than the loss and loss adjustment expense ratio of 28.8% in the same period of 2018. The underwriting expense ratio of 37.5% in the second quarter of 2019 was 0.2 points lower than the underwriting expense ratio of 37.7% in the same period of 2018.
 
Net favorable prior year reserve development in the second quarters of 2019 and 2018 provided 6.2 points and 14.8 points of benefit, respectively, to the combined ratio.  Catastrophe losses in the second quarters of 2019 and 2018 accounted for 0.1 points and 0.8 points, respectively, of the combined ratio.  The underlying combined ratio in the second quarter of 2019 was 0.5 points higher than the 2018 ratio on the same basis.

The combined ratio of 77.9% in the first six months of 2019 was 7.4 points higher than the combined ratio of 70.5% in the same period of 2018. The loss and loss adjustment expense ratio of 40.3% in the first six months of 2019 was 7.7 points higher than the loss and loss adjustment expense ratio of 32.6% in the same period of 2018.  The underwriting expense ratio of 37.6% in the first six months of 2019 was 0.3 points lower than the underwriting expense ratio of 37.9% in the same period of 2018.

Net favorable prior year reserve development in the first six months of 2019 and 2018 provided 3.4 points and 10.5 points of benefit, respectively, to the combined ratio.  Catastrophe losses in the first six months of 2019 and 2018 accounted for 0.2 points

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and 0.4 points, respectively, of the combined ratio.  The underlying combined ratio in the first six months of 2019 was 0.5 points higher than the 2018 ratio on the same basis.

Written Premiums
The Bond & Specialty Insurance segment’s gross and net written premiums were as follows:
 
 
Gross Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Domestic:
 
 

 
 

 
 

 
 

Management Liability
 
$
432

 
$
378

 
$
821

 
$
742

Surety
 
251

 
240

 
473

 
458

Total Domestic
 
683

 
618

 
1,294

 
1,200

International
 
64

 
56

 
115

 
112

Total Bond & Specialty Insurance
 
$
747

 
$
674

 
$
1,409

 
$
1,312


 
 
Net Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Domestic:
 
 

 
 

 
 

 
 

Management Liability
 
$
403

 
$
362

 
$
770

 
$
710

Surety
 
244

 
235

 
428

 
420

Total Domestic
 
647

 
597

 
1,198

 
1,130

International
 
63

 
56

 
99

 
97

Total Bond & Specialty Insurance
 
$
710

 
$
653

 
$
1,297

 
$
1,227

 
Gross and net written premiums in the second quarter of 2019 increased by 11% and 9%, respectively, over the same period of 2018. Gross written premiums in the first six months of 2019 increased by 7% over the same period of 2018. Net written premiums increased at a lower rate of 6% in the first six months of 2019, reflecting higher ceded written premiums for several reinsurance treaties, including those related to the new catastrophe reinsurance treaty.
 
Domestic.  Net written premiums of $647 million and $1.20 billion in the second quarter and first six months of 2019, respectively, increased by 8% and 6%, respectively, over the same periods of 2018.  Excluding the surety line of business, for which the following are not relevant measures, business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive and were comparable with the same periods of 2018. New business premiums in the second quarter and first six months of 2019 increased over the same periods of 2018.
 
International.  Net written premiums of $63 million and $99 million in the second quarter and first six months of 2019, respectively, increased by 13% and 2%, respectively, over the same periods of 2018. The increases in both periods of 2019 were primarily driven by increases in Canada and the United Kingdom, partially offset by the impact of changes in foreign currency exchange rates.
 

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Personal Insurance
 
Results of Personal Insurance were as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(dollars in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenues
 
 

 
 

 
 

 
 

Earned premiums
 
$
2,573

 
$
2,453

 
$
5,080

 
$
4,840

Net investment income
 
109

 
98

 
208

 
197

Fee income
 
5

 
5

 
10

 
9

Other revenues
 
21

 
14

 
43

 
31

Total revenues
 
2,708

 
2,570

 
5,341

 
5,077

 
 
 
 
 
 
 
 
 
Total claims and expenses
 
2,606

 
2,599

 
4,892

 
4,949

 
 
 
 
 
 
 
 
 
Segment income (loss) before income taxes
 
102

 
(29
)
 
449

 
128

Income tax expense (benefit)
 
14

 
(12
)
 
83

 
16

Segment income (loss)
 
$
88

 
$
(17
)
 
$
366

 
$
112

 
 
 
 
 
 
 
 
 
Loss and loss adjustment expense ratio
 
73.7
%
 
77.6
%
 
68.8
%
 
74.2
%
Underwriting expense ratio
 
26.5

 
27.3

 
26.4

 
27.1

Combined ratio
 
100.2
%
 
104.9
%
 
95.2
%
 
101.3
%
 
Overview
Segment income in the second quarter of 2019 was $88 million, compared with a segment loss of $(17) million in the same period of 2018, primarily reflecting the pre-tax impacts of (i) lower catastrophe losses and (ii) higher net investment income, partially offset by (iii) lower underlying underwriting margins. Catastrophe losses in the second quarters of 2019 and 2018 were $156 million and $315 million, respectively.  Net favorable prior year reserve development in each of the second quarters of 2019 and 2018 was $13 million. The lower underlying underwriting margins primarily resulted from the impacts of (i) higher non-catastrophe weather-related losses in Agency Homeowners and Other and (ii) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty, mostly impacting Agency Homeowners and Other, partially offset by (iii) earned pricing that exceeded loss cost trends in Agency Automobile and (iv) higher business volumes. The segment incurred income tax expense in the second quarter of 2019 compared to an income tax benefit in the same period of 2018.

Segment income in the first six months of 2019 was $366 million, $254 million higher than segment income of $112 million in the same period of 2018. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development. Catastrophe losses in the first six months of 2019 and 2018 were $251 million and $531 million, respectively.  Net favorable prior year reserve development in the first six months of 2019 and 2018 was $82 million and $62 million, respectively.  Income tax expense in the first six months of 2019 was higher than in the same period of 2018, primarily reflecting the impact of the increase in segment income before income taxes.
 
Revenues
 
Earned Premiums
Earned premiums in the second quarter of 2019 were $2.57 billion, $120 million or 5% higher than in the same period of 2018.  Earned premiums in the first six months of 2019 were $5.08 billion, $240 million or 5% higher than in the same period of 2018. The increases in both periods of 2019 primarily reflected the increase in net written premiums over the preceding twelve months. The increases in earned premiums in both periods of 2019 were reduced by the earned impact of the new catastrophe reinsurance treaty.
 

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Net Investment Income
Net investment income in the second quarter of 2019 was $109 million, $11 million or 11% higher than in the same period of 2018. Net investment income in the first six months of 2019 was $208 million, $11 million or 6% higher than in the same period of 2018. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the increase in the Company’s consolidated net investment income in the second quarter and first six months of 2019 compared with the same periods of 2018.  In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for a discussion of the Company’s net investment income allocation methodology.
 
Other Revenues
Other revenues in the second quarters and first six months of 2019 and 2018 primarily consisted of installment premium charges.
 
Claims and Expenses
 
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the second quarter of 2019 were $1.90 billion, comparable with the same period of 2018, primarily reflecting the impacts of (i) higher non-catastrophe weather-related losses in Agency Homeowners and Other, (ii) higher business volumes and (iii) loss cost trends, largely offset by (iv) lower catastrophe losses.

Claims and claim adjustment expenses in the first six months of 2019 were $3.49 billion, $98 million or 3% lower than in the same period of 2018, primarily reflecting the impacts of (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development, partially offset by (iii) higher non-catastrophe weather-related losses in Agency Homeowners and Other, (iv) higher business volumes and (v) loss cost trends.

Factors contributing to net favorable prior year reserve development during the first six months of 2019 and 2018 are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
 
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the second quarter of 2019 was $398 million, $18 million or 5% higher than in the same period of 2018.  Amortization of deferred acquisition costs in the first six months of 2019 was $788 million, $34 million or 5% higher than in the same period of 2018. The increases in both periods of 2019 were consistent with the increases in earned premiums.
 
General and Administrative Expenses
General and administrative expenses in the second quarter of 2019 were $311 million, $5 million or 2% lower than in the same period of 2018. General and administrative expenses in the first six months of 2019 were $611 million, $7 million or 1% higher than in the same period of 2018.

Income Tax Expense (Benefit)
Income tax expense in the second quarter of 2019 was $14 million, compared with an income tax benefit of $(12) million in same period of 2018, primarily reflecting the impact of the $131 million increase in segment income before income taxes. Income tax expense in the first six months of 2019 was $83 million, $67 million higher than in the same period of 2018, primarily reflecting the impact of the $321 million increase in segment income before income taxes.

Combined Ratio
 
The combined ratio of 100.2% in the second quarter of 2019 was 4.7 points lower than the combined ratio of 104.9% in the same period of 2018.  The loss and loss adjustment expense ratio of 73.7% in the second quarter of 2019 was 3.9 points lower than the loss and loss adjustment expense ratio of 77.6% in the same period of 2018.  The underwriting expense ratio of 26.5% for the second quarter of 2019 was 0.8 points lower than the underwriting expense ratio of 27.3% in the same period of 2018. 
 
Catastrophe losses in the second quarters of 2019 and 2018 accounted for 6.1 points and 12.8 points, respectively, of the combined ratio. Net favorable prior year reserve development in each of the second quarters of 2019 and 2018 provided 0.5 points of benefit to the combined ratio. The underlying combined ratio in the second quarter of 2019 was 2.0 points higher than the 2018 ratio on the same basis, primarily reflecting (i) higher non-catastrophe weather-related losses in Agency Homeowners and Other and (ii) the impact on earned premiums related to the new catastrophe reinsurance treaty, mostly impacting Agency Homeowners and

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Other, partially offset by the impact of (iii) earned pricing that exceeded loss cost trends in Agency Automobile and (iv) a lower underwriting expense ratio.

The combined ratio of 95.2% in the first six months of 2019 was 6.1 points lower than the combined ratio of 101.3% in the same period of 2018. The loss and loss adjustment expense ratio of 68.8% in the first six months of 2019 was 5.4 points lower than the loss and loss adjustment expense ratio of 74.2% in the same period of 2018.  The underwriting expense ratio of 26.4% in the first six months of 2019 was 0.7 points lower than the underwriting expense ratio of 27.1% in the same period of 2018.

Catastrophe losses in the first six months of 2019 and 2018 accounted for 4.9 points and 11.0 points, respectively, of the combined ratio.  Net favorable prior year reserve development in the first six months of 2019 and 2018 provided 1.6 points and 1.3 points of benefit, respectively, to the combined ratio.  The underlying combined ratio in the first six months of 2019 was 0.3 points higher than the 2018 ratio on the same basis.
  
Written Premiums
Personal Insurance’s gross and net written premiums were as follows:
 
 
Gross Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Domestic:
 
 

 
 

 
 

 
 

Agency:
 
 

 
 

 
 

 
 

Automobile
 
$
1,304

 
$
1,265

 
$
2,544

 
$
2,457

Homeowners and Other
 
1,268

 
1,148

 
2,222

 
2,021

Total Agency
 
2,572

 
2,413

 
4,766

 
4,478

Direct-to-Consumer
 
103

 
98

 
201

 
191

Total Domestic
 
2,675

 
2,511

 
4,967

 
4,669

International
 
209

 
206

 
364

 
357

Total Personal Insurance
 
$
2,884

 
$
2,717

 
$
5,331

 
$
5,026

 
 
 
Net Written Premiums
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Domestic:
 
 

 
 

 
 

 
 

Agency:
 
 

 
 

 
 

 
 

Automobile
 
$
1,300

 
$
1,258

 
$
2,524

 
$
2,441

Homeowners and Other
 
1,258

 
1,137

 
2,095

 
1,969

Total Agency
 
2,558

 
2,395

 
4,619

 
4,410

Direct-to-Consumer
 
103

 
99

 
198

 
191

Total Domestic
 
2,661

 
2,494

 
4,817

 
4,601

International
 
205

 
203

 
356

 
352

Total Personal Insurance
 
$
2,866

 
$
2,697

 
$
5,173

 
$
4,953

 
Domestic Agency Written Premiums
Personal Insurance’s domestic Agency business comprises business written through agents, brokers and other intermediaries.
 
Domestic Agency gross and net written premiums in the second quarter of 2019 both increased by 7% over the same period of 2018. Domestic Agency gross written premiums in the first six months of 2019 increased by 6% over the same period of 2018.

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Domestic Agency net written premiums increased at a lower rate of 5% in the first six months of 2019, primarily reflecting the impact of the new catastrophe reinsurance treaty entered into in the first quarter of 2019.
 
Domestic Agency Automobile net written premiums of $1.30 billion and $2.52 billion in the second quarter and first six months of 2019, respectively, both increased by 3% over the same periods of 2018.  Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive but were lower than in the same periods of 2018.  New business premiums in the second quarter and first six months of 2019 increased over the same periods of 2018.
 
Domestic Agency Homeowners and Other net written premiums of $1.26 billion and $2.10 billion in the second quarter and first six months of 2019, respectively, increased by 11% and 6%, respectively, over the same periods of 2018.  Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the second quarter and first six months of 2019.  Renewal premium changes in the second quarter and first six months of 2019 remained positive and were higher than in the same periods of 2018.  New business premiums in the second quarter and first six months of 2019 increased over the same periods of 2018.
 
For its Domestic Agency business, the Personal Insurance segment had approximately 7.3 million and 7.0 million active policies at June 30, 2019 and 2018, respectively.

Direct-to-Consumer and International Written Premiums
Direct-to-Consumer net written premiums of $103 million and $198 million in the second quarter and first six months of 2019, respectively, both increased by 4% over the same periods of 2018, primarily reflecting growth in homeowners and other. Net written premiums in the first six months of 2019 were reduced by the new catastrophe reinsurance treaty.
 
International net written premiums of $205 million and $356 million in the second quarter and first six months of 2019, respectively, both increased by 1% over the same periods of 2018, primarily driven by growth in automobile net written premiums, partially offset by the impact of changes in foreign currency exchange rates.
 
For its international and direct-to-consumer business, Personal Insurance had approximately 901,000 and 895,000 active policies at June 30, 2019 and 2018, respectively.
 
Interest Expense and Other
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Income (loss)
 
$
(76
)
 
$
(78
)
 
$
(151
)
 
$
(154
)
 
The Income (loss) for Interest Expense and Other in the second quarters of 2019 and 2018 was $(76) million and $(78) million, respectively.  Pre-tax interest expense in the second quarters of 2019 and 2018 was $89 million and $90 million respectively. After-tax interest expense in the second quarters of 2019 and 2018 was $70 million and $71 million, respectively. The Income (loss) for Interest Expense and Other in the first six months of 2019 and 2018 was $(151) million and $(154) million, respectively. Pre-tax interest expense in the first six months of 2019 and 2018 was $177 million and $179 million, respectively. After-tax interest expense in the first six months of 2019 and 2018 was $140 million and $141 million, respectively.


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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. Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the 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.  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 Company’s 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 disputes, including litigation, with a number of policyholders, some of whom are in bankruptcy over coverage for asbestos-related 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. Although the Company has seen a reduction in the overall risk associated with these disputes, it remains difficult to predict the ultimate cost of these claims. 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 would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions.

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 policyholder’s 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; the 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.
 
The Company’s 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 and field office category and the assumed reinsurance and other category 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 and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company’s overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company’s overall view of the current underlying

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asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.

Net asbestos paid loss and loss expenses in the first six months of 2019 and 2018 were $102 million and $98 million, respectively. Net asbestos reserves were $1.18 billion at both June 30, 2019 and June 30, 2018.
 
The following table displays activity for asbestos losses and loss expenses and reserves:
(at and for the six months ended June 30, in millions)
 
2019
 
2018
Beginning reserves:
 
 

 
 

Gross
 
$
1,608

 
$
1,538

Ceded
 
(327
)
 
(257
)
Net
 
1,281

 
1,281

 
 
 
 
 
Incurred losses and loss expenses:
 
 

 
 

Gross
 
—

 
—

Ceded
 
—

 
—

Net
 
—

 
—

 
 
 
 
 
Paid loss and loss expenses:
 
 

 
 

Gross
 
134

 
130

Ceded
 
(32
)
 
(32
)
Net
 
102

 
98

 
 
 
 
 
Foreign exchange and other:
 
 

 
 

Gross
 
—

 
—

Ceded
 
—

 
—

Net
 
—

 
—

 
 
 
 
 
Ending reserves:
 
 

 
 

Gross
 
1,474

 
1,408

Ceded
 
(295
)
 
(225
)
Net
 
$
1,179

 
$
1,183

_________________________________________________________
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. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties.
 
The Company has also 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

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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 only extinguish any liability arising from known specified sites or claims.  In many instances, these agreements also include indemnities and hold harmless provisions to protect the Company.  The Company’s general purpose in executing these agreements is to reduce the Company’s 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. Conventional actuarial methods are not used to estimate these reserves.

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 as well as the costs associated with coverage litigation on environmental matters have been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. As a result of these factors, the Company increased its net environmental reserves by $60 million and $55 million in the second quarters of 2019 and 2018, respectively.
 
Net environmental paid loss and loss expenses in the first six months of 2019 and 2018 were $35 million and $26 million, respectively. At June 30, 2019, approximately 95% of the net environmental reserve (approximately $342 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 Company’s experience in resolving those claims. The balance, approximately 5% of the net environmental reserve (approximately $17 million), consists of case reserves.
 

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The following table displays activity for environmental losses and loss expenses and reserves:
(at and for the six months ended June 30, in millions)
 
2019
 
2018
Beginning reserves:
 
 

 
 

Gross
 
$
358

 
$
373

Ceded
 
(24
)
 
(13
)
Net
 
334

 
360

 
 
 
 
 
Incurred losses and loss expenses:
 
 

 
 

Gross
 
67

 
71

Ceded
 
(7
)
 
(16
)
Net
 
60

 
55

 
 
 
 
 
Paid loss and loss expenses:
 
 

 
 

Gross
 
36

 
30

Ceded
 
(1
)
 
(4
)
Net
 
35

 
26

 
 
 
 
 
Foreign exchange and other:
 
 

 
 

Gross
 
(1
)
 
(1
)
Ceded
 
1

 
—

Net
 
—

 
(1
)
 
 
 
 
 
Ending reserves:
 
 

 
 

Gross
 
388

 
413

Ceded
 
(29
)
 
(25
)
Net
 
$
359

 
$
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 management’s 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. Changes in the legal, regulatory and legislative environment may impact the resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. 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 could affect the settlement of asbestos and environmental 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.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves.  In addition, the Company’s 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 Company’s operating results in future periods.


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INVESTMENT PORTFOLIO
 
The Company’s invested assets at June 30, 2019 were $75.50 billion, of which 94% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 4% 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 Company’s fixed maturity portfolio at June 30, 2019 was $67.17 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 Company’s insurance and debt obligations.  The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both June 30, 2019 and December 31, 2018.  Below investment grade securities represented 2.3% of the total fixed maturity investment portfolio at both June 30, 2019 and December 31, 2018. The weighted average effective duration of fixed maturities and short-term securities was 4.2 (4.4 excluding short-term securities) at June 30, 2019 and 4.5 (4.7 excluding short-term securities) at December 31, 2018.
 
Obligations of States, Municipalities and Political Subdivisions
 
The Company’s fixed maturity investment portfolio at June 30, 2019 and December 31, 2018 included $29.73 billion and $28.61 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, 2019 and December 31, 2018 were $2.33 billion and $2.85 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 and obligations of U.S. government and government agencies and authorities.  These trusts were created to fund the payment of principal and interest due under the bonds.  The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee.  All of the Company’s holdings of securities issued by Puerto Rico and related entities have been pre-refunded and therefore are defeased by U.S. Treasury securities.
 
The Company bases its investment decision on the underlying credit characteristics of the municipal security. The weighted average credit rating of the municipal bond portfolio was "Aaa/Aa1" at both June 30, 2019 and December 31, 2018.
 
Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities
 
The Company’s fixed maturity investment portfolio at June 30, 2019 and December 31, 2018 included $2.93 billion and $2.57 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs), 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 Company’s investment strategy generally favors securities that reduce this risk within expected interest rate ranges.  Included in the totals at June 30, 2019 and December 31, 2018 were $1.18 billion and $859 million, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government 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 $1.74 billion and $1.71 billion at June 30, 2019 and December 31, 2018, respectively. Approximately 51% and 52% of the Company’s CMO holdings at June 30, 2019 and December 31, 2018, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC.  The weighted average credit rating of the $854 million and $828 million of non-guaranteed CMO holdings at both June 30, 2019 and December 31, 2018 was "Aa1." The weighted average credit rating of all of the above securities was "Aaa/Aa1" at both June 30, 2019 and December 31, 2018.  For further discussion regarding the Company’s investments in residential CMOs, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Portfolio” in the Company’s 2018 Annual Report.
 
Equity Securities, Real Estate and Short-Term Investments
 
See note 1 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for further information about these invested asset classes.
 

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Other Investments
 
The Company also invests in private equity limited partnerships, hedge funds and real estate partnerships and joint ventures.  Also included in other investments are non-public common and preferred equities and derivatives.  These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility.  At June 30, 2019 and December 31, 2018, the carrying value of the Company’s other investments was $3.47 billion and $3.56 billion, respectively.

CATASTROPHE REINSURANCE COVERAGE

The Company's catastrophe reinsurance coverage is discussed in the "Catastrophe Reinsurance" section of "Part I - Item 1 - Business" in the Company's 2018 Annual Report. Except as discussed below, there have been no material changes to the Company's catastrophe reinsurance coverage from that reported in the Company's 2018 Annual Report.

Catastrophe Bonds. With respect to the Company’s indemnity reinsurance agreement with Long Point Re III Ltd., the attachment point and maximum limit were reset as required annually to adjust the expected loss of the layer within a predetermined range. For the period May 25, 2019 through and including May 24, 2020, the Company will be entitled to begin recovering amounts under this reinsurance agreement if the covered losses in the covered area for a single occurrence reach an initial attachment amount of $1.79 billion. The full $500 million coverage amount is available until such covered losses reach a maximum $2.29 billion.

Other Catastrophe Reinsurance Treaties. Catastrophe reinsurance treaties that renewed on July 1, 2019 were as follows:

•
Northeast Property Catastrophe Excess-of-Loss Reinsurance Treaty. This treaty provides up to $600 million part of $850 million of coverage, subject to a $2.25 billion retention (i.e. for every dollar of loss between $2.25 billion and $3.10 billion this treaty provides 71 cents of coverage), for losses arising from a single occurrence, subject to one reinstatement. Coverage is provided on an all perils basis, including but not limited to hurricanes, tornadoes, hail storms, earthquakes and winter storm and/or freeze losses (coverage is included for terrorism events in limited circumstances, but nuclear, biological and radiological attacks are entirely excluded) from Virginia to Maine for the period July 1, 2019 through and including June 30, 2020. Losses from a covered event anywhere in the United States, Canada, the Caribbean and Mexico and waters contiguous thereto may be used to satisfy the retention. Recoveries under catastrophe bonds (if any) would be first applied to reduce losses subject to this treaty.

•
Middle Market Earthquake Catastrophe Excess-of-Loss Reinsurance Treaty. This treaty provides for up to $225 million part of $250 million of coverage, subject to a $100 million retention (i.e. for every dollar of loss between $100 million and $350 million this treaty provides 90 cents of coverage), for losses arising from an earthquake, including fire following and sprinkler leakage incurred under policies written by Technology, Public Sector Services and Commercial Accounts in Business Insurance for the period July 1, 2019 through and including June 30, 2020.

•
Canadian Property Catastrophe Excess-of-Loss Reinsurance Treaty.  This treaty provides coverage for 50% of losses in excess of C$100 million (US$76 million at June 30, 2019), up to C$200 million (US$153 million at June 30, 2019) and for 100% of losses in excess of C$200 million (US$153 million at June 30, 2019), up to C$600 million (US$458 million at June 30, 2019) for the accumulation of net property losses arising out of one occurrence on business written by the Company’s Canadian businesses for the period July 1, 2019 through and including June 30, 2020.  The treaty covers all property written by the Company’s Canadian businesses, including, but not limited to, habitational property, commercial property, inland marine, ocean marine and auto physical damages exposures.

The Company regularly reviews its catastrophe reinsurance coverage and may adjust such coverage in the future.

REINSURANCE RECOVERABLES
 
For a description of the Company’s reinsurance recoverables, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance Recoverables” in the Company’s 2018 Annual Report.
 
The following table summarizes the composition of the Company’s reinsurance recoverables:

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(in millions)
 
June 30,
2019
 
December 31, 2018
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses
 
$
3,410

 
$
3,485

Allowance for uncollectible reinsurance
 
(107
)
 
(110
)
Net reinsurance recoverables
 
3,303

 
3,375

Mandatory pools and associations
 
1,959

 
2,005

Structured settlements
 
2,972

 
2,990

Total reinsurance recoverables
 
$
8,234

 
$
8,370

 
Net reinsurance recoverables at June 30, 2019 decreased by $72 million from December 31, 2018, primarily reflecting the impacts of cash collections in the first six months of 2019.

OUTLOOK
 
The following discussion provides outlook information for certain key drivers of the Company’s results of operations and capital position.
 
Premiums.  The Company’s 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 Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations.  Property and casualty insurance market conditions are expected to remain competitive.  Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.
 
Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards during the remainder of 2019 and into 2020. In Business Insurance, the Company expects that domestic renewal premium changes during the remainder of 2019 will remain positive and will be higher than the levels attained in the same period of 2018, and that domestic renewal premium changes into 2020 will remain positive and will be slightly higher than the levels attained in the same period of 2019. In Bond & Specialty Insurance, the Company expects that renewal premium changes with respect to domestic management liability business during the remainder of 2019 will remain positive and will be higher than the levels attained in the same period of 2018, and that domestic renewal premium changes into 2020 will remain positive and will be broadly consistent with the levels attained in the same period of 2019. In Personal Insurance, the Company expects that domestic Agency Automobile renewal premium changes during the remainder of 2019 and into 2020 will remain positive but will be lower than the levels attained in the same periods of 2018 and 2019. The Company expects that domestic Agency Homeowners and Other renewal premium changes during the remainder of 2019 and into 2020 will remain positive and will be higher than the levels attained in the same periods of 2018 and 2019. The need for state regulatory approval for changes to personal and many commercial property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.  With regard to the Company's international business, the Company expects that renewal premium changes during the remainder of 2019 in aggregate will remain positive and will be higher than the levels attained in the same period of 2018, and that renewal premium changes into 2020 in aggregate will remain positive and will be broadly consistent with the levels attained in the same period of 2019. Given the relatively smaller amount of premium that the Company generates from outside the United States and the transactional nature of some of those markets, particularly Lloyd’s, international renewal premium changes can be more volatile and therefore difficult to predict.
 
Property and casualty insurance market conditions are expected to remain competitive during the remainder of 2019 and into 2020 for new business.  In each of the Company’s business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business.  However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time.
 

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Economic conditions in the United States and elsewhere could change, due to a variety of factors, including the political and regulatory environment, changes to fiscal stimulus programs, inflation or deflation (including the impact of rapid changes in wages and/or commodity prices), the imposition of tariffs or other barriers to international trade, fluctuations in interest rates and foreign currency exchange rates, high levels of global debt after an extended period of low interest rates, the United Kingdom’s withdrawal from the European Union, a shutdown of the U.S. government, the failure by the U.S. government to raise the debt ceiling, changes to the U.S. Federal budget and further potential changes in tax laws in the United States or modification of the Affordable Care Act. The resulting changes in levels of economic activity could positively or negatively impact exposure changes at renewal and the Company’s ability to write business at acceptable rates. Additionally, changes in levels of economic activity could positively or negatively impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written.  All of the foregoing, in turn, could positively or negatively impact net written premiums during the remainder of 2019 and into 2020, and because earned premiums are a function of net written premiums, earned premiums could be impacted on a lagging basis.
 
Underwriting Gain/Loss. The Company’s 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. Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss activity; changes in current period loss estimates resulting from prior period loss development; changes in business mix; changes in reinsurance coverages and/or costs; premium adjustments; and variability in expenses and assessments.

Catastrophe losses and non-catastrophe weather-related losses are inherently unpredictable from period to period. The Company’s results of operations could be adversely impacted if significant catastrophe and non-catastrophe weather-related losses were to occur.

For a number of years, the Company’s results have included significant amounts of net favorable prior year reserve development driven by better than expected loss experience. 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 changes in economic conditions could lead to higher or lower inflation than the Company had anticipated, which could in turn lead to an increase or decrease in the Company’s loss costs and the need to strengthen or reduce claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that require a relatively longer period of time to finalize and settle claims for a given accident year and, accordingly, are relatively more inflation sensitive. For a further discussion, see “Part I-Item 1A-Risk Factors-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, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, our financial results could be materially and adversely affected” in the Company’s 2018 Annual Report.
 
In Business Insurance, the Company expects underlying underwriting margins during the remainder of 2019 and into 2020 in aggregate will be higher than in the same periods of 2018 and 2019, and the underlying combined ratio during the remainder of 2019 and into 2020 in aggregate will be lower than in the same periods of 2018 and 2019, assuming improved results in the Company's international business and lower and more normal levels of non-catastrophe weather-related losses. The outlook for Business Insurance also reflects the timing impact of higher loss estimates in the commercial automobile product line that were recognized in the fourth quarter of 2018.

In Bond & Specialty Insurance, the Company expects that underlying underwriting margins and the underlying combined ratio during the remainder of 2019 and into 2020 in aggregate will be broadly consistent with the same periods of 2018 and 2019.

In Personal Insurance, the Company expects underlying underwriting margins during the remainder of 2019 and into 2020 in aggregate will be higher than in the same periods of 2018 and 2019, and the underlying combined ratio during the remainder of 2019 and into 2020 in aggregate will be lower than in the same periods of 2018 and 2019, assuming non-catastrophe weather-related losses return to lower and more normal levels. In Agency Automobile, with the exception of the fourth quarter of 2019, the Company expects that underlying underwriting margins and the underlying combined ratio during the remainder of 2019 and into 2020 in aggregate will be broadly consistent with the same periods of 2018 and 2019. In the fourth quarter of 2019, the

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Company expects that underlying underwriting margins in Agency Automobile will be lower and the underlying combined ratio will be higher than in the same period of 2018 due to a low level of loss activity in the fourth quarter of 2018. In Agency Homeowners and Other, the Company expects underlying underwriting margins during the remainder of 2019 and into 2020 in aggregate will be higher than in the same periods of 2018 and 2019, and the underlying combined ratio during the remainder of 2019 and into 2020 in aggregate will be lower than in the same periods of 2018 and 2019, assuming non-catastrophe weather-related losses return to lower and more normal levels.

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 weighted average effective duration of fixed maturities and short-term securities was 4.2 (4.4 excluding short-term securities) at June 30, 2019.  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.  At June 30, 2019, the Company had no open U.S. Treasury futures contracts.  The Company continually evaluates its investment alternatives and mix.  Currently, the majority of the Company’s 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 Company’s results of operations. Based on the impact of slightly higher levels of fixed income investments (fixed maturity and short-term investments), partially offset by expected lower reinvestment yields on fixed income investments, the Company expects that during the remainder of 2019 after-tax net investment income from those portfolios will be approximately $10 million to $15 million higher on a quarterly basis as compared to the corresponding quarters of 2018. For the first two quarters of 2020, after-tax net investment income from those portfolios will be broadly consistent on a quarterly basis as compared to the corresponding quarters of 2019. The impact of future market conditions on net investment income from the Company's remaining investment portfolios during the remainder of 2019 and into 2020 is hard to predict. If general economic conditions and/or investment market conditions change, the Company could experience an increase or decrease in net investment income and/or significant realized investment gains or losses (including impairments) compared with the same periods of 2018 and 2019.
 
The Company had a net pre-tax unrealized investment gain of $2.39 billion ($1.88 billion after-tax) in its fixed maturity investment portfolio at June 30, 2019.  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. The Company's investment portfolio has benefited from certain tax exemptions (primarily those related to interest from municipal bonds) and certain other tax laws, including, but not limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits). Changes in these laws could adversely impact the value of the Company's investment portfolio. See "Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact us" included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report.
 
For further discussion of the Company’s investment portfolio, see “Investment Portfolio.” For a discussion of the risks to the Company’s business during or following a financial market disruption and risks to the Company’s investment portfolio, see the risk factors entitled “During or following a period of financial market disruption or an economic downturn, our business could be materially and adversely affected” and “Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses” included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report.  For a discussion of the risks to the Company’s investments from foreign currency exchange rate fluctuations, see the risk factor entitled “We are also subject to a number of additional risks associated with our business outside the United States” included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report and see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Rate Risk” in the Company’s 2018 Annual Report.
 
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 net 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 Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, changes in levels of written premiums,

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funding of the Company’s qualified pension plan, capital requirements of the Company’s 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 Company’s common share repurchases in 2019, see “Liquidity and Capital Resources.” 

As a result of the Company’s business outside of the United States, primarily in Canada, the United Kingdom (including Lloyd’s), the Republic of Ireland and Brazil, the Company’s capital is also subject to the effects of changes in foreign currency exchange rates (including with respect to the valuation of the Company's foreign investments and interests in joint ventures).  For example, strengthening of the U.S. dollar in comparison to other currencies could result in a reduction of shareholders’ equity.  For additional discussion of the Company’s foreign exchange market risk exposure, see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2018 Annual Report.
 
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 Company’s 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 Company’s results of operations or financial position, see “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report and “Critical Accounting Estimates.”

LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity is a measure of a company’s 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 Company’s insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities.  For further discussion of operating company liquidity, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Company’s 2018 Annual Report.
 
Holding Company Liquidity.  TRV’s 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, 2019, TRV held total cash and short-term invested assets in the United States aggregating $1.46 billion and having a weighted average maturity of 47 days.  TRV has established a holding company liquidity target equal to its estimated annual pre-tax interest expense and common shareholder dividends (currently approximately $1.19 billion).  TRV’s holding company liquidity of $1.46 billion at June 30, 2019 exceeded this target and it is the opinion of the Company’s management that these assets are sufficient to meet TRV’s current liquidity requirements.

TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company’s foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company’s financial position or liquidity at June 30, 2019.
 
TRV has a shelf registration statement filed with the Securities and Exchange Commission (SEC) that expires on June 10, 2022 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 on June 4, 2023. At June 30, 2019, the Company had $100 million of commercial paper outstanding. 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 $338 million to provide a portion of the capital needed to support its obligations at Lloyd’s at June 30, 2019. 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 Lloyd’s, which could include utilizing holding company funds on hand.
 

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Operating Activities
Net cash provided by operating activities in the first six months of 2019 and 2018 was $1.79 billion and $1.70 billion, respectively.  The increase in cash flows in the first six months of 2019 primarily reflected higher levels of cash received for (i) premiums and (ii) net investment income, partially offset by the impacts of higher levels of payments for (iii) claims and claim adjustment expenses, (iv) commission expenses and (v) income taxes.

Investing Activities
Net cash used in investing activities in the first six months of 2019 and 2018 was $701 million and $457 million, respectively.  The Company’s consolidated total investments at June 30, 2019 increased by $3.22 billion, or 4% over year-end 2018, primarily reflecting the impacts of (i) net unrealized gains on investments at June 30, 2019 as compared with net unrealized losses on investments at December 31, 2018, as a result of decreases in market interest rates during the first six months of 2019 and (ii) net cash flows provided by operating activities, partially offset by (iii) common share repurchases and (iv) dividends paid to shareholders.

Financing Activities
Net cash used in financing activities in the first six months of 2019 and 2018 was $1.05 billion and $1.17 billion, respectively.  The totals in both periods primarily reflected common share repurchases, the payment of debt and dividends paid to shareholders, partially offset by the issuance of debt and the net proceeds from employee stock option exercises. Common share repurchases in the first six months of 2019 and 2018 were $797 million and $751 million, respectively. 
 
Dividends.  Dividends paid to shareholders were $419 million and $404 million in the first six months of 2019 and 2018, respectively. The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s financial position, earnings, capital requirements of the Company’s 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 23, 2019, the Company announced that it declared a regular quarterly dividend of $0.82 per share, payable September 30, 2019 to shareholders of record on September 10, 2019.
 
Share Repurchase Authorization.  The Company’s 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 Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s 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, 2019, the Company repurchased 2.6 million and 5.5 million shares under its share repurchase authorization, for a total cost of $375 million and $750 million, respectively.  The average cost per share repurchased was $145.87 and $137.15.  At June 30, 2019, the Company had $2.54 billion of capacity remaining under the share repurchase authorization.
 
Capital Structure.  The following table summarizes the components of the Company’s capital structure at June 30, 2019 and December 31, 2018.

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(in millions)
 
June 30,
2019
 
December 31,
2018
Debt:
 
 

 
 
Short-term
 
$
100

 
$
600

Long-term
 
6,504

 
6,004

Net unamortized fair value adjustments and debt issuance costs
 
(46
)
 
(40
)
Total debt
 
6,558

 
6,564

 
 
 
 
 
Shareholders’ equity:
 
 

 
 

Common stock and retained earnings, less treasury stock
 
25,115

 
24,753

Accumulated other comprehensive income (loss)
 
206

 
(1,859
)
Total shareholders’ equity
 
25,321

 
22,894

Total capitalization
 
$
31,879

 
$
29,458

 
On March 4, 2019, the Company issued $500 million aggregate principal amount of 4.10% senior notes that will mature on March 4, 2049.  The net proceeds were used to repay the Company's $500 million, 5.90% senior notes on June 2, 2019. See note 8 of notes to the unaudited consolidated financial statements for further discussion regarding the terms of the senior notes. 
 
The following table provides a reconciliation of total capitalization presented in the foregoing table to total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity.
(dollars in millions)
 
June 30,
2019
 
December 31,
2018
Total capitalization
 
$
31,879

 
$
29,458

Less: net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
 
1,878

 
(113
)
Total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
 
$
30,001

 
$
29,571

Debt-to-total capital ratio
 
20.6
%
 
22.3
%
Debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
 
21.9
%
 
22.2
%

The debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders’ equity, is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes, included in shareholders’ equity. 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 Company’s management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company’s financial leverage position. The Company’s ratio of debt-to-total capital excluding after-tax net unrealized investment gains (losses) included in shareholders’ equity of 21.9% at June 30, 2019 was within the Company’s target range of 15% to 25%.

RATINGS

Ratings are an important factor in assessing the Company’s 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), Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P).  The following rating agency actions were taken with respect to the Company since April 18, 2019, the date on which the Company’s Form 10-Q for the quarter ended March 31, 2019 was filed with the SEC.   For additional discussion of ratings, see “Part I—Item 1—Business—Ratings” in the Company’s 2018 Annual Report.

•
On May 20, 2019, Fitch affirmed all ratings of the Company. The outlook for all ratings is stable.

•
On June 26, 2019, S&P assigned a financial strength rating of "A+" to the Company's newly established insurance subsidiary in the Republic of Ireland, Travelers Insurance Designated Activity Company. The outlook for this rating is stable.

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CRITICAL ACCOUNTING ESTIMATES
 
For a description of the Company’s critical accounting estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in the Company’s 2018 Annual Report.  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 Company’s critical accounting estimates since December 31, 2018.
 
Claims and Claim Adjustment Expense Reserves
The table below displays the Company’s gross claims and claim adjustment expense reserves by product line.  Because the establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates, currently established claims and claim adjustment expense reserves may change.  The Company reflects adjustments to the reserves in the results of operations in the period the estimates are changed.  These changes in estimates could result in income statement charges that could be material to the Company’s operating results in future periods.  In particular, a portion of the Company’s gross claims and claim adjustment expense reserves (totaling $1.86 billion at June 30, 2019) are for asbestos and environmental claims and related litigation.  Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the summary table below.  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 Company’s 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 Company’s future operating results. 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” in this report.
 
Gross claims and claim adjustment expense reserves by product line were as follows:
 
 
June 30, 2019
 
December 31, 2018
(in millions)
 
Case
 
IBNR
 
Total
 
Case
 
IBNR
 
Total
General liability
 
$
4,852

 
$
7,100

 
$
11,952

 
$
4,780

 
$
7,092

 
$
11,872

Commercial property
 
1,103

 
390

 
1,493

 
1,157

 
297

 
1,454

Commercial multi-peril
 
2,047

 
1,989

 
4,036

 
2,089

 
1,886

 
3,975

Commercial automobile
 
2,451

 
1,699

 
4,150

 
2,339

 
1,661

 
4,000

Workers’ compensation
 
10,234

 
9,250

 
19,484

 
10,299

 
9,216

 
19,515

Fidelity and surety
 
266

 
294

 
560

 
280

 
288

 
568

Personal automobile
 
1,999

 
1,389

 
3,388

 
2,038

 
1,400

 
3,438

Homeowners and personal—other
 
867

 
946

 
1,813

 
942

 
884

 
1,826

International and other
 
2,594

 
1,589

 
4,183

 
2,574

 
1,431

 
4,005

Property-casualty
 
26,413

 
24,646

 
51,059

 
26,498

 
24,155

 
50,653

Accident and health
 
14

 
—

 
14

 
15

 
—

 
15

Claims and claim adjustment expense reserves
 
$
26,427

 
$
24,646

 
$
51,073

 
$
26,513

 
$
24,155

 
$
50,668

 
The $405 million increase in gross claims and claim adjustment expense reserves since December 31, 2018 primarily reflected the impacts of (i) higher volumes of insured exposures and loss cost trends for the current accident year and (ii) catastrophe losses in the first six months of 2019, largely offset by the impacts of (iii)  payments related to catastrophe losses incurred in 2018 and (iv) net favorable prior year reserve development.

FUTURE APPLICATION OF ACCOUNTING STANDARDS
 
See note 1 of notes to the unaudited consolidated financial statements contained in this quarterly report and in the Company’s 2018 Annual Report for a discussion of recently issued accounting pronouncements.

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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.  These statements include, among other things, the Company’s statements about:
 
•
the Company’s outlook and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, renewal premium changes, underwriting margins and underlying underwriting margins, net and core income, investment income and performance, loss costs, return on equity, core return on equity and expected current returns and combined ratios and underlying combined ratios);
•
share repurchase plans;
•
future pension plan contributions;
•
the sufficiency of the Company’s 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 (including changes in interest rates), economic (including inflation, changes in tax law, changes in commodity prices and fluctuations in foreign currency exchange rates) and underwriting market conditions;
•
strategic and operational initiatives to improve profitability and competitiveness;
•
the Company's competitive advantages;
•
new product offerings;
•
the impact of new or potential regulations imposed or to be imposed by the United States or other nations, including tariffs or other barriers to international trade; and
•
the impact of legislation enacted or to be enacted by states allowing victims of sexual abuse to file or proceed with claims that otherwise would have been time-barred.
 
The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s 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 Company’s results of operations, its financial position and/or liquidity, and could adversely impact the Company’s ratings, the Company’s ability to raise capital and the availability and cost of reinsurance;
•
if actual claims exceed the Company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, the Company’s financial results could be materially and adversely affected;
•
during or following a period of financial market disruption or an economic downturn, the Company’s business could be materially and adversely affected;
•
the Company’s investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses;
•
the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
•
the intense competition that the Company faces, and the impact of innovation, technological change and changing customer preferences on the insurance industry and the markets in which the Company operates, could harm its ability to maintain or increase its business volumes and its profitability;
•
disruptions to the Company’s relationships with its independent agents and brokers or the Company’s inability to manage effectively a changing distribution landscape could adversely affect the Company;
•
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 Company’s business are uncertain;

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FORWARD-LOOKING STATEMENTS, Continued

•
the Company may not be able to collect all amounts due to it from reinsurers, reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all and the Company is exposed to credit risk related to its structured settlements;
•
the Company is also exposed to credit risk in certain of its insurance operations and with respect to certain guarantee or indemnification arrangements that it has with third parties;
•
within the United States, the Company’s businesses are heavily regulated by the states in which it conducts business, including licensing, market conduct and financial supervision, and changes in regulation may reduce the Company’s profitability and limit its growth;
•
a downgrade in the Company’s claims-paying and financial strength ratings could adversely impact the Company’s business volumes, adversely impact the Company’s ability to access the capital markets and increase the Company’s borrowing costs;
•
the inability of the Company’s insurance subsidiaries to pay dividends to the Company’s holding company in sufficient amounts would harm the Company’s ability to meet its obligations, pay future shareholder dividends and/or make future share repurchases;
•
the Company’s efforts to develop new products, expand in targeted markets or improve business processes and workflows 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 Company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology, particularly as its business processes become more digital;
•
if the Company experiences difficulties with technology, data and network security (including as a result of cyber attacks), outsourcing relationships or cloud-based technology, the Company’s ability to conduct its business could be negatively impacted;
•
the Company is also subject to a number of additional risks associated with its business outside the United States, such as foreign currency exchange fluctuations (including with respect to the valuation of the Company's foreign investments and interests in joint ventures) and restrictive regulations as well as the risks and uncertainties associated with the United Kingdom's withdrawal from the European Union;
•
regulatory changes outside of the United States, including in Canada, the United Kingdom, the Republic of Ireland and the European Union, could adversely impact the Company’s results of operations and limit its growth;
•
loss of or significant restrictions on the use of particular types of underwriting criteria, such as credit scoring, or other data or methodologies, in the pricing and underwriting of the Company’s products could reduce the Company’s 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 designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;
•
the Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;
•
intellectual property is important to the Company’s 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 the intellectual property of others;
•
changes in federal regulation could impose significant burdens on the Company and otherwise adversely impact the Company’s results;
•
changes in U.S. tax laws or in the tax laws of other jurisdictions where the Company operates could adversely impact the Company; and
•
the Company’s share repurchase plans depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, changes in levels of written premiums, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.
 
The Company’s 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 captions “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report filed with the SEC and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s 2018 Annual Report as updated by the Company's periodic filings with the SEC.


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WEBSITE AND SOCIAL MEDIA DISCLOSURE
 
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 posted on and accessible through the Company’s website at http://investor.travelers.com, its Facebook page at https://www.facebook.com/travelers and its Twitter account (@Travelers) at https://twitter.com/Travelers.  In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Notifications” section under the "For Investors" heading at http://investor.travelers.com.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
For the Company’s disclosures about market risk, please see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2018 Annual Report filed with the SEC.  There have been no material changes to the Company’s disclosures about market risk in Part II—Item 7A of the Company’s 2018 Annual Report.

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 Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s 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 Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2019.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
 
During the quarter ended June 30, 2019, the Company consolidated the premium collection of automated clearing house (ACH) and credit card payments for Business Insurance and Bond & Specialty Insurance into a single payment processing platform with a third-party provider, which has resulted in certain changes to business processes and internal control over financial reporting. Other than this consolidation to the single payment processing platform, there were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management reviewed and tested the effectiveness of the internal controls over financial reporting related to the consolidation to the single payment processing platform and concluded they were effective.

The Company regularly seeks to identify, develop and implement improvements to its technology systems and business processes, some of which may affect its internal control over financial reporting. These changes may include such activities as implementing new, more efficient systems, updating existing systems or platforms, automating manual processes or utilizing technology developed by third parties.  These systems changes are often phased in over multiple periods in order to limit the implementation risk in any one period, and as each change is implemented the Company monitors its effectiveness as part of its internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.         LEGAL PROCEEDINGS
 
The information required with respect to this item can be found under “Contingencies” in note 14 of notes to the unaudited consolidated financial statements contained in this quarterly report and is incorporated by reference into this Item 1.


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Item 1A.  RISK FACTORS
 
For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report filed with the SEC.  In addition, please see “Part I—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook” and “—Critical Accounting Estimates” herein and in the Company’s 2018 Annual Report.  There have been no material changes to the risk factors disclosed in Part I—Item 1A of the Company’s 2018 Annual Report.

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
shares
purchased
 
Average price paid
per share
 
Total number of
shares purchased
as part of
publicly announced
plans or programs
 
Approximate
dollar value of
shares that may
yet be purchased
under the
plans or programs
(in millions)
April 1, 2019
 
April 30, 2019
 
405,098

 
$
139.23

 
404,700

 
$
2,855

May 1, 2019
 
May 31, 2019
 
1,120,337

 
$
144.94

 
1,119,155

 
$
2,692

June 1, 2019
 
June 30, 2019
 
1,048,985

 
$
149.43

 
1,047,105

 
$
2,536

Total
 
 
 
2,574,420

 
$
145.87

 
2,570,960

 
$
2,536

 
The Company’s 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 most recent authorization was approved by the Board of Directors in April 2017 and added $5.0 billion of repurchase capacity to the $709 million capacity remaining at that date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.
 
The Company acquired 3,460 shares for a total cost of $0.5 million during the three months ended June 30, 2019 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 unit awards and performance share awards, and shares used by employees to cover the price of certain stock options that were exercised.

For additional information regarding the Company’s share repurchases, see “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Item 5.   OTHER INFORMATION
 
Executive Ownership and Sales. All of the Company’s executive officers are subject to the Company’s executive stock ownership policy. For a summary of this policy as currently in effect, see “Compensation Discussion and Analysis - Additional Compensation Information - Stock Ownership Guidelines, Anti-Hedging and Pledging Policies, and Other Trading Restrictions” in the Company’s proxy statement filed with the SEC on April 5, 2019 (Proxy Statement). From time to time, some of the Company’s 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, in compliance with the stock ownership policy, sell shares of common stock of the Company on the open market, in private transactions or to the Company. To effect such sales, from time to time, some of the Company’s executives may enter into trading plans designed to comply with the Company’s 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 Company’s 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, none of the Company's named executive officers (i.e. an executive

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Item 5. OTHER INFORMATION, Continued

officer included in the compensation disclosures in the Company's Proxy Statement) have entered into a Rule 10b5-1 trading plan that remains in effect.



Item 6.   EXHIBITS
Exhibit Number
 
Description of Exhibit
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
10.1
 
 
 
 
31.1†
 
 
 
 
31.2†
 
 
 
 
32.1†
 
 
 
 
32.2†
 
 
 
 
101.1†
 
The following financial information from The Travelers Companies, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in Inline XBRL: (i) Consolidated Statement of Income for the three months and six months ended June 30, 2019 and 2018; (ii) Consolidated Statement of Comprehensive Income for the three months and six months ended June 30, 2019 and 2018; (iii) Consolidated Balance Sheet at June 30, 2019 and December 31, 2018; (iv) Consolidated Statement of Changes in Shareholders’ Equity for the three months and six months ended June 30, 2019 and 2018; (v) Consolidated Statement of Cash Flows for the six months ended June 30, 2019 and 2018; 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 except for the terms of the agreements or other documents themselves, and you should not rely on them for other than 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 do not apply in any other context or at any time other than the date they were made.

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SIGNATURES
 
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 23, 2019
By
/S/   CHRISTINE K. KALLA
 
 
Christine K. Kalla
Executive Vice President and General Counsel
(Authorized Signatory)
 
 
 
Date: July 23, 2019
By
/S/    DOUGLAS K. RUSSELL
 
 
Douglas K. Russell
Senior Vice President and Corporate Controller (Principal Accounting Officer)


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