The Company, through its subsidiaries, owns an investment portfolio of income-producing properties and real estate funds. Included in this portfolio are four office buildings in which the Company holds a 50% ownership interest located in New York, New York, which collectively accounted for approximately 12% of the carrying value of the property portfolio at December 31, 2012.
(1)On January 1, 2009, the Company adopted the FASB's updated accounting guidance related to earnings per share. The impact of the adoption of this guidance was a reduction of previously reported basic and diluted earnings per share for the year ended December 31, 2008 by $0.03 per share and $0.01 per share, respectively.
•Total investments of $73.84 billion; fixed maturities and short-term securities comprise 93% of total investments
Diluted net income per share in 2012 was $6.30, an increase of 88% over diluted net income per share of $3.36 in 2011. Net income in 2012 was $2.47 billion, an increase of 73% over net income of $1.43 billion in 2011. The higher rate of increase in diluted net income per share reflected the impact of common share repurchases. The improvement in net income in 2012 compared with 2011 primarily reflected the pretax impact of (i) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") primarily resulting from lower non-catastrophe weather-related losses in the Business Insurance and Personal Insurance segments and the impact of earned pricing that exceeded loss cost trends in the Business Insurance and Financial, Professional & International Insurance segments, (ii) a decline in catastrophe losses and (iii) higher net favorable prior year reserve development. Partially offsetting these pretax improvements were their
Factors contributing to the changes in earned premiums in each segment in 2012 and 2011 compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Net investment income in 2012 was $2.89 billion, $10 million or less than 1% higher than in 2011. Net investment income from fixed maturity investments was $2.44 billion in 2012, a decrease of $104 million from 2011, primarily resulting from lower long-term reinvestment yields available in the market. Net investment income generated by non-fixed maturity investments was $476 million in 2012, an increase of $121 million over 2011, primarily driven by improved results from the Company's real estate partnerships and hedge fund investments. On an after-tax basis, net investment income in 2012 was $14 million or less than 1% lower than in 2011, reflecting a higher proportion of taxable net investment income in 2012 compared with 2011.
Other net realized investment gains in 2010 of $290 million were primarily driven by a $205 million gain resulting from the Company's sale of substantially all of its remaining common stock holdings in Verisk Analytics, Inc. (Verisk) for total proceeds of approximately $230 million as part of a secondary public offering of Verisk. The 2010 total also included $96 million of net realized investment gains
related to fixed maturity investments and $25 million of net realized investment gains related to equity securities. These gains were partially offset by $30 million of net realized investment losses related to U.S. Treasury futures contracts.
Other revenues primarily consist of premium installment charges. In 2010, this category also included $60 million of expenses related to the Company's purchase and retirement of $885 million of its $1.0 billion 6.25% fixed-to-floating rate junior subordinated debentures.
Claims and claim adjustment expenses in 2012 were $14.68 billion, $1.60 billion or 10% lower than in 2011. The decrease primarily reflected (i) a decline in catastrophe losses and, to a lesser extent, (ii) lower levels of non-catastrophe weather-related losses and (iii) higher net favorable prior year reserve development, partially offset by (iv) the impact of loss cost trends. Catastrophe losses in 2012 and 2011 were $1.86 billion and $2.56 billion, respectively. Catastrophe losses in 2012 primarily resulted from Storm Sandy, as well as multiple tornado, wind and hail storms in several regions of the United States. Catastrophe losses in 2011 primarily resulted from Hurricane Irene and Tropical Storm Lee, multiple tornadoes and hail storms in the Midwest and Southeast regions of the United States and severe winter storms throughout the United States. Catastrophe losses in 2011 also included losses from floods in Thailand and an earthquake in Japan that impacted the Financial, Professional & International Insurance segment. Net favorable prior year reserve development in 2012 and 2011 was $940 million and $715 million, respectively. Factors contributing to net favorable prior year reserve development in each segment during these periods are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
Claims and claim adjustment expenses in 2011 were $16.28 billion, $3.07 billion or 23% higher than in 2010. The increase primarily reflected (i) the significant increase in catastrophe losses, (ii) the decrease in net favorable prior year reserve development, (iii) the impact of loss cost trends and (iv) higher non-catastrophe weather-related losses. Catastrophe losses in 2011 and 2010 were $2.56 billion and $1.11 billion, respectively. Catastrophe losses in 2010 primarily resulted from several severe wind and hail storms, as well as severe winter storms. In addition, catastrophe losses in 2010 included losses from an earthquake in Chile that impacted the Financial, Professional & International Insurance segment. Net favorable prior year reserve development in 2011 and 2010 was $715 million and $1.25 billion, respectively. Factors contributing to net favorable prior year reserve development in each segment are discussed in note 7 of notes to the Company's consolidated financial statements.
Interest expense in 2012, 2011 and 2010 was $378 million, $386 million and $388 million, respectively. The decline in 2012 compared with 2011 reflected the repayment of $258 million of debt in the second quarter of 2012.
The Company's consolidated income tax benefit in 2011 was $74 million, compared to an income tax expense of $1.09 billion in 2010. The decrease in income tax expense of $1.16 billion in 2011 from 2010 primarily reflected the $2.59 billion decrease in underwriting margins in 2011 (including the unfavorable impacts of an increase in catastrophe losses and a decrease in net favorable prior year reserve development) from 2010 and, to a lesser extent, the decrease in net realized investment gains of $209 million from 2010. The change in income tax expense (benefit) in 2011 from 2010 was also impacted by the $104 million benefit recorded in 2011 resulting from the favorable resolution of various prior year tax matters.
The Company's effective tax rate was 22%, (5%) and 25% in 2012, 2011 and 2010, respectively. The Company's effective tax rates in 2012 and 2010 were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Company's income tax provision. In addition to the impact of tax-exempt income, the Company's effective tax rate of (5%) in 2011 also reflected the impact of the Company's significant underwriting loss that primarily resulted from catastrophe losses and the $104 million benefit resulting from the favorable resolution of various prior year tax matters recorded in the first quarter of 2011.
The consolidated GAAP combined ratio of 105.1% in 2011 was 11.9 points higher than the consolidated GAAP combined ratio of 93.2% in 2010.
points and 5.2 points of the 2011 and 2010 loss and loss adjustment expense ratios, respectively. The 2011 and 2010 loss and loss adjustment expense ratios included 3.2 points and 5.8 points of benefit from net favorable prior year reserve development, respectively. The consolidated 2011 underlying loss and loss adjustment expense ratio was 2.9 points higher than the 2010 ratio on the same basis, reflecting the factors discussed above.
Gross and net written premiums in 2012 increased by 2% and 1%, respectively, over 2011. Gross and net written premiums in 2011 both increased by 3% over 2010. Factors contributing to the changes in gross and net written premiums in each segment in 2012 and 2011 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Operating income in 2012 was $1.84 billion, $489 million or 36% higher than operating income of $1.35 billion in 2011. The improvement in operating income in 2012 compared with 2011 primarily reflected the pretax impact of (i) higher underlying underwriting margins primarily resulting from earned pricing that exceeded loss cost trends, lower non-catastrophe weather-related losses and higher business volume, (ii) a decline in catastrophe losses, (iii) an increase in net favorable prior year reserve development and (iv) an increase in net investment income. Partially offsetting these pretax improvements were their related tax expense. The effective tax rate in 2012 increased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income. Operating income in 2011 included a $76 million benefit resulting from the favorable resolution of various prior year tax matters. Catastrophe losses in 2012 were $794 million, compared with $1.02 billion in 2011. Net favorable prior year reserve development in 2012 was $467 million, compared with $245 million in 2011.
Operating income in 2011 was $1.35 billion, $947 million or 41% lower than in 2010. The decline in operating income in 2011 compared with 2010 primarily reflected the pretax impact of (i) lower net favorable prior year reserve development, (ii) a significant increase in catastrophe losses, (iii) lower underlying underwriting margins related to earned pricing and loss cost trends, partially offset by higher business volume, and (iv) lower net investment income. Partially offsetting these net pretax declines were their related net tax benefit. The effective tax rate in 2011 decreased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income. These factors were partially offset by the $76 million benefit resulting from the favorable resolution of various prior year tax matters. Net favorable prior year reserve development was $245 million in 2011, compared with $901 million in 2010. Catastrophe losses in 2011 were $1.02 billion, compared with $437 million in 2010.
Earned premiums in 2012 were $11.69 billion, $364 million or 3% higher than in 2011. Earned premiums in 2011 were $11.33 billion, $561 million or 5% higher than in 2010. The increases in both years primarily reflected the impact of increases in net written premiums over the preceding twelve months. Earned premiums in 2012 and 2011 also benefited from positive audit premium adjustments related to increased insured exposures for existing policyholders, compared with negative audit premium adjustments in 2010 related to decreased insured exposures for existing policyholders.
Net investment income in 2012 was $2.09 billion, $49 million or 2% higher than in 2011, primarily due to higher net investment income generated by non-fixed maturity investments, partially offset by lower net investment income from fixed maturity investments. Net investment income in 2011 was $2.04 billion, $115 million or 5% lower than in 2010, primarily due to lower net investment income generated by fixed maturity investments. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2012 and 2011 compared with the respective prior years. In addition, refer to note 2 of notes to the Company's consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
market pools. Fee income in 2012 increased by $27 million or 9% over 2011. Fee income in 2011 increased by $10 million or 4% over 2010. The increases in both years primarily reflected higher serviced premium volume in workers' compensation residual market pools.
General and administrative expenses in 2012 were $2.02 billion, $76 million or 4% higher than in 2011. The increase in 2012 included the impact of higher employee-related costs. General and administrative expenses in 2011 were $1.94 billion, $40 million or 2% higher than in 2010, primarily driven by a higher level of state assessment expenses related to workers' compensation business in New York, which more than offset an overall reduction in operating expenses that was driven by lower employee-related costs.
Income tax expense in 2011 was $134 million, compared to $777 million in 2010. The decrease in income tax expense of $643 million in 2011 from 2010 primarily reflected the $1.48 billion decrease in underwriting margins (including the unfavorable impacts of an increase in catastrophes and a decrease in net favorable prior year reserve development) from 2011. The change in income tax expense in 2011 from 2010 was also impacted by the $76 million benefit in 2011 resulting from the favorable resolution of various prior year tax matters.
The underwriting expense ratio of 31.5% in 2012 was 0.1 points lower than the 2011 underwriting expense ratio of 31.6%.
In 2012, gross and net written premiums increased by 6% and 5%, respectively, over 2011. The increases in gross and net written premiums were concentrated in Commercial Accounts, Industry-Focused Underwriting, National Accounts and Target Risk Underwriting, and were largely driven by rate increases and positive audit premium adjustments (which were higher than in 2011). Overall business retention rates remained strong in 2012 but were lower than in 2011. Both components of renewal premium changes-renewal rate changes and insured exposure growth-remained positive in 2012, and renewal premium changes increased over 2011. New business levels in 2012 declined from 2011.
National Accounts. Net written premiums of $907 million in 2012 increased by 16% over 2011. Business retention rates remained high in 2012 and were level with 2011. Renewal premium changes were positive and increased over 2011, driven by payroll exposure growth. New business volumes in 2012 also increased over 2011. In addition, growth in workers' compensation residual market pools contributed to premium growth in 2012. Net written premiums of $782 million in 2011 decreased by 3% from 2010, primarily reflecting negative retrospective premium adjustments related to prior year policies. Business retention rates remained high in 2011 and increased slightly over 2010, while renewal premium changes in 2011 also increased over 2010. New business volume in 2011 declined slightly from 2010.
Industry-Focused Underwriting. Net written premiums of $2.55 billion in 2012 increased by 6% over 2011. Premium increases in 2012 were driven by growth in the Construction, Oil & Gas and Technology business units. Business retention rates in 2012 remained strong and were virtually level with 2011. Renewal premium changes remained positive in 2012 and increased over 2011, primarily due to renewal rate increases. New business volume in 2012 declined from 2011. Net written premiums of $2.41 billion in 2011 increased by 5% over 2010, primarily driven by growth in Construction, Oil & Gas and Technology.
Target Risk Underwriting. Net written premiums of $1.67 billion in 2012 increased by 5% over 2011. Premium increases in 2012 were concentrated in the National Property and Inland Marine business units. Business retention rates in 2012 remained strong but declined from 2011. Renewal premium changes remained positive in 2012 and increased over 2011, primarily due to renewal rate increases. New business volume in 2012 declined from 2011. Net written premiums of $1.59 billion in 2011 increased slightly over 2010, as premium growth in Inland Marine and Excess Casualty was largely offset by a decline in National Property.
Operating income in 2012 was $642 million, $5 million or 1% lower than operating income in 2011. The decline in operating income in 2012 compared with 2011 primarily reflected the pretax declines in net favorable prior year reserve development and net investment income, largely offset by higher underlying underwriting margins resulting from the pretax impact of (i) lower levels of what the Company defines as large losses and (ii) earned pricing that exceeded loss cost trends, partially offset by (iii) the impact of lower business volumes. The effective tax rate in 2012 increased slightly from the prior year, reflecting the impact of a $14 million benefit in 2011 resulting from the favorable resolution of various prior year tax matters. Net favorable prior year reserve development in 2012 was $298 million, compared with $360 million in 2011. Catastrophe losses in 2012 were $50 million, compared with $55 million in 2011.
Operating income in 2011 was $647 million, $27 million or 4% higher than operating income in 2010. The improvement in operating income in 2011 compared with 2010 primarily reflected a pretax increase in underwriting margins, partially offset by a pretax decline in net investment income. The increase in underwriting margins was driven by the pretax impact of (i) higher net favorable prior year reserve development and (ii) declines in catastrophe and non-catastrophe weather-related losses, partially offset by the impact of (i) lower business volume, (ii) higher general and administrative expenses and (iii) a higher level of large losses. The effective tax rate in 2011 decreased slightly from the prior year, reflecting the impact of a $14 million benefit in 2011 resulting from the favorable resolution of various prior year tax matters. Net favorable prior year reserve development in 2011 was $360 million, compared with $259 million in 2010. Catastrophe losses in 2011 were $55 million, compared with $82 million in 2010.
Earned premiums in 2012 were $3.05 billion, $129 million or 4% lower than in 2011, primarily reflecting the impact of lower construction surety premium volumes over the preceding twelve months, intentional underwriting actions undertaken in the Company's operations at Lloyd's intended to improve risk and reward (particularly in the catastrophe-exposed lines of business), the impact of the termination of an exclusive broker relationship in the Republic of Ireland, the Company's withdrawal from personal insurance business in the Republic of Ireland, competitive market conditions and, to a lesser extent, foreign currency rates of exchange.
Earned premiums in 2011 were $3.17 billion, $143 million or 4% lower than in 2010. The decline primarily reflected the impact of the termination of an exclusive broker relationship in the Republic of Ireland, lower construction surety premium volumes over the preceding twelve months, intentional underwriting actions undertaken in the Company's operations at Lloyd's intended to improve risk and reward (particularly in the catastrophe-exposed lines of business) and competitive market conditions. Earned premiums in 2011 benefited slightly from the favorable impact of foreign currency exchange rates. In addition, earned premiums in 2010 benefited from the impact of a reduction in surety reinsurance costs associated with prior year reinsurance treaties.
Net investment income in 2012 was $395 million, $19 million or 5% lower than in 2011, primarily due to lower net investment income from fixed maturity investments, partially offset by higher net investment income generated by non-fixed maturity investments. Net investment income in 2011 was $414 million, $25 million or 6% lower than in 2010. Included in the Financial, Professional & International Insurance segment are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. As a result, reported net investment income in the Financial, Professional & International Insurance segment reflects a significantly smaller proportion of allocated net investment income, including that from the Company's non-fixed maturity investments that experienced an increase in investment income in 2012 and 2011. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2012 and 2011 compared with the respective prior years. In addition, refer to note 2 of notes to the Company's consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
Claims and claim adjustment expenses in 2012 were $1.31 billion, $173 million or 12% lower than in 2011, primarily reflecting (i) lower levels of large losses and (ii) the impact of lower construction surety premium volumes and intentional underwriting actions as discussed above, partially offset by (iii) a decline in net favorable prior year reserve development. Net favorable prior year reserve development in 2012 was $298 million, compared with $360 million in 2011. Both Bond & Financial Products and International contributed to net favorable prior year reserve development in 2012. Factors contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements. Catastrophe losses in 2012 were $50 million, compared with $55 million in 2011.
Claims and claim adjustment expenses in 2011 were $1.49 billion, $213 million or 13% lower than in 2010, primarily reflecting (i) an increase in net favorable prior year reserve development, (ii) a decline in catastrophe losses, (iii) lower non-catastrophe weather-related losses and (iv) lower business volume, partially offset by a higher level of large losses. Net favorable prior year reserve development was $360 million and $259 million in 2011 and 2010, respectively. Factors contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements. Catastrophe losses in 2011 were $55 million, compared with $82 million in 2010.
lower than in 2010. The decrease in 2012 was generally consistent with the decrease in earned premiums, whereas the decrease in 2011 was less than the decrease in earned premiums, primarily due to the increase to earned premiums in 2010 as a result of a reduction in surety reinsurance costs associated with prior year reinsurance treaties.
General and administrative expenses in 2012 were $667 million, $19 million or 3% higher than in 2011. General and administrative expenses were $648 million in 2011, $40 million or 7% higher than in 2010. The increases in both 2012 and 2011 primarily reflected increases in employee- and technology-related costs to enhance operations and support future business growth.
Income tax expense in 2012 was $255 million, compared to $230 million in 2011. The increase in income tax expense of $25 million in 2012 from 2011 primarily reflected the impact of a $14 million benefit in 2011 from the favorable resolution of various prior year tax matters and, to a lesser extent, an increase in underwriting margins in 2012 from 2011.
Net written premiums in Bond & Financial Products in 2012 were $1.92 billion, $29 million or 1% lower than in 2011. The decrease was primarily driven by lower business volume in construction surety due to the continued low levels of government construction spending, which was largely offset by growth in management liability business volume. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in 2012 remained strong and were slightly higher than in 2011. Renewal premium changes in 2012 were positive and significantly higher than in 2011, primarily driven by positive renewal rate changes. New business volume in 2012 was slightly lower than in 2011.
Operating income in 2012 was $217 million, $549 million higher than the operating loss of ($332) million in 2011. The improvement in operating income in 2012 compared with 2011 primarily reflected the pretax impact of (i) a decline in catastrophe losses, (ii) higher underlying underwriting margins resulting from lower non-catastrophe weather-related losses and lower fire-related losses and (iii) an increase in net favorable prior year reserve development. Partially offsetting these pretax improvements were their related tax expense. The effective tax rate in 2012 increased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income. The operating loss in 2011 included the impact of a $10 million benefit resulting from the favorable resolution of various prior year tax matters. Catastrophe losses in 2012 were $1.02 billion, compared with $1.49 billion in 2011. Net favorable prior year reserve development in 2012 was $175 million, compared with $110 million in 2011.
An operating loss of ($332) million in 2011 compared with operating income of $440 million in 2010. The decline in operating income in 2011 compared with 2010 primarily reflected the pretax impact of (i) a significant increase in catastrophe losses, (ii) lower underlying underwriting margins related to earned pricing and loss cost trends, higher non-catastrophe weather-related losses and an increase in expenses related to the Company's direct to consumer initiative, partially offset by higher business volumes, and (iii) lower net investment income. Partially offsetting these net pretax declines were their related net tax benefit. The effective tax rate in 2011 decreased from the prior year due to interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a higher percentage of pretax income. These factors were partially offset by an increase in net favorable prior year reserve development and a $10 million benefit resulting from the
favorable resolution of various prior year tax matters. Catastrophe losses in 2011 were $1.49 billion, compared with $594 million in 2010. Net favorable prior year reserve development in 2011 was $110 million, compared with $87 million in 2010.
Claims and claim adjustment expenses in 2012 were $5.50 billion, $837 million or 13% lower than in 2011. The decrease primarily reflected (i) a decline in catastrophe losses and, to a lesser extent, (ii) lower non-catastrophe weather-related losses, (iii) lower fire-related losses and (iv) higher net favorable prior year reserve development, partially offset by (v) the impact of loss cost trends, including a higher number of severe bodily injury claims in the automobile line of business. Catastrophe losses in 2012 were $1.02 billion, compared with $1.49 billion in 2011. Net favorable prior year reserve development in 2012 was $175 million, compared with $110 million in 2011. Factors contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
The amortization of deferred acquisition costs in 2012 was $1.44 billion, $21 million or 1% lower than in 2011. The amortization of deferred acquisition costs in 2011 was $1.46 billion, $17 million or 1% higher than in 2010. The changes in deferred acquisition costs in both 2012 and 2011 differed from the change in earned premiums, primarily reflecting an increase in the number of agents reverting to a contingent commission compensation program (the costs of which are classified in "general and administrative expenses") from a fixed-value compensation program (the costs of which are classified in
General and administrative expenses in 2012 were $900 million, $8 million or 1% lower than in 2011. General and administrative expenses in 2011 were $908 million, $41 million or 5% higher than in 2010. The increase in 2011 was primarily driven by costs associated with the Company's direct to consumer initiative, as well as the increase in contingent commission expense due to the increase in the number of agents reverting to a contingent commission compensation program. The cost of the contingent commission program is not subject to deferred acquisition cost accounting treatment and, therefore, is expensed as incurred.
The income tax benefit in 2011 was $293 million, compared to income tax expense of $134 million in 2010. The change in income tax expense (benefit) of ($427) million in 2011 from 2010 primarily reflected the $1.15 billion decrease in underwriting margins (including the unfavorable impacts of an increase in catastrophes and a decline in net favorable prior year reserve development) from 2011. The change in income tax expense (benefit) was also impacted by the $10 million benefit in 2011 resulting from the favorable resolution of various prior year tax matters.
The underwriting expense ratio of 30.1% in 2011 was 0.1 points lower than the underwriting expense ratio of 30.2% in 2010.
In 2012, gross and net written Agency written premiums both decreased 2% from the respective totals in 2011. In 2011, gross and net Agency written premiums both increased 2% over the respective totals in 2010.
In the Agency Automobile line of business, net written premiums in 2012 were 4% lower than in 2011. Business retention rates remained strong but were lower than in 2011, while new business levels in 2012 declined from 2011, largely as a result of the Company's pricing strategy and other profitability improvement initiatives. Renewal premium changes remained positive in 2012 and increased over 2011. Net written premiums in 2011 were slightly lower than in 2010. Business retention rates in 2011 remained strong, while new business levels declined from 2010. Renewal premium changes remained positive in 2011 and increased over 2010.
For its Agency business, the Personal Insurance segment had approximately 7.1 million and 7.7 million active policies at December 31, 2012 and 2011, respectively.
In its direct to consumer business, net written premiums in 2012 were $158 million, $24 million or 18% higher than in 2011. The increase in net written premiums in 2012 resulted from a $15 million or 15% increase in automobile net written premiums and a $9 million or 26% increase in homeowners and other net written premiums compared to 2011. Net written premiums in 2011 were $134 million, $37 million or 38% higher than in 2010. The increase in net written premiums in 2011 resulted from a $26 million or 35% increase in automobile net written premiums and an $11 million or 48% increase in
Travelers Property Casualty Corp. (TPC), a wholly-owned subsidiary of the Company, had entered into settlement agreements which are subject to a number of contingencies, in connection with a number of these direct action claims (Direct Action Settlements). For a full discussion of these settlement agreements, see the "Asbestos Direct Action Litigation" section of note 16 of notes to the consolidated financial statements.
During 2012, total gross and net asbestos-related payments decreased when compared with 2011, primarily resulting from a decline in both gross and net payments to policyholders with whom the Company has entered into settlement agreements. The Home Office and Field Office categories, which
account for the vast majority of policyholders with active asbestos-related claims, experienced a modest reduction in gross asbestos-related payments during 2012 when compared with 2011, while net asbestos payments were flat. Payments on behalf of policyholders in these categories continue to be influenced by the high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury continue to target previously peripheral defendants. The number of policyholders tendering asbestos claims for the first time in 2012 and the number of policyholders with open asbestos claims both increased slightly when compared with 2011.
The completion of these reviews and analyses in 2012, 2011 and 2010 resulted in $175 million, $175 million and $140 million increases, respectively, in the Company's net asbestos reserves in each period. In each year, the reserve increases were primarily driven by increases in the Company's estimate of projected settlement and defense costs related to a broad number of policyholders in the Home Office category and by higher projected payments on assumed reinsurance accounts. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be moderately higher than previously anticipated due to the impact of the current litigation environment discussed above. The increase in 2010 also reflected increases in costs of litigating asbestos-related coverage matters and was partially offset by a $70 million benefit from the reduction in the allowance for uncollectible reinsurance resulting from a favorable ruling related to a reinsurance dispute. Notwithstanding these trends, the Company's overall view of the underlying asbestos environment is essentially unchanged from recent periods, and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.
The "policyholders with settlement agreements" category includes structured settlements, coverage in place arrangements and, with respect to TPC, Wellington accounts. Reserves are based on the expected payout for each policyholder under the applicable agreement. Structured settlements are arrangements under which policyholders and/or plaintiffs agree to fixed financial amounts to be paid at scheduled times. Coverage in place arrangements represent agreements with policyholders on specified amounts of coverage to be provided. Payment obligations may be subject to annual maximums and are
only made when valid claims are presented. Wellington accounts refer to the 35 defendants that are parties to a 1985 agreement settling certain disputes concerning insurance coverage for their asbestos claims. Many of the aspects of the Wellington agreement are similar to those of coverage in place arrangements in which the parties have agreed on specific amounts of coverage and the terms under which the coverage can be accessed.
On January 29, 2009, the Company and PPG Industries, Inc ("PPG"), along with approximately 30 other insurers of PPG, agreed in principle to an agreement to settle asbestos-related coverage litigation under insurance policies issued to PPG. The tentative settlement agreement has been incorporated into the Modified Third Amended Plan of Reorganization ("Amended Plan") proposed as part of the Pittsburgh Corning Corp. ("PCC", which is 50% owned by PPG) bankruptcy proceeding. Pursuant to the proposed Amended Plan, which was filed on January 30, 2009, PCC, along with enumerated other companies (including PPG as well as the Company as a participating insurer), are to receive protections afforded by Section 524(g) of the Bankruptcy Code from certain asbestos-related bodily injury claims. Under the agreement in principle, the Company has the option to make a series of payments over the next 20 years totaling approximately $620 million to the Trust to be created under the Amended Plan, or it may elect to make a one-time discounted payment, which, as of March 31, 2013, would total approximately $481 million (approximately $452 million after reinsurance). The agreement in principle with PPG is subject to numerous contingencies, including final court approval of the Amended Plan, and the Company has no obligation to make the settlement payment until all contingencies are satisfied. The Company's obligations under this agreement in principle are included in the "home office and field office" category in the preceding table.
Company may have for other claims, including but not limited to asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which extinguish any liability arising from known specified sites or claims. Where appropriate, these agreements also include indemnities and hold harmless provisions to protect the Company. The 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.
The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980's. 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. Overall net environmental claim payments in 2012 were essentially unchanged from 2011. 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. The degree to which those favorable trends have continued, however, has been less than anticipated. As a result, in 2012 and 2011, the Company increased its net environmental reserves by $90 million and $76 million, respectively. In 2010, the Company increased its net environmental reserves by $35 million due to a modest upward development in the expected defense and settlement costs for certain of its pending policyholders.
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims at December 31, 2012 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. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company's previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Company's ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory
and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments. (Also see note 16 of notes to the consolidated financial statements in this report).
The following table sets forth the Company's fixed maturity investment portfolio rated using external ratings agencies or by the Company when a public rating does not exist:
The Company's fixed maturity investment portfolio at December 31, 2012 and 2011 included $38.68 billion and $39.02 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 December 31, 2012 and 2011 were $9.03 billion and $7.33 billion, respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as pre-refunded bonds), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. Such escrow accounts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee and are almost exclusively comprised of U.S. Treasury securities. Moody's Investors Service has assigned negative outlooks to municipal securities in both the state sector and local government sector within the United States.
The Company bases its investment decision on the underlying credit characteristics of the municipal security. While its municipal bond portfolio includes a number of securities that were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default, the Company does not rely on enhanced credit characteristics provided by such third-party insurance as part of its investing decisions. The downgrade during 2008 and 2009 of credit ratings of insurers of these securities resulted in a corresponding downgrade in the ratings of many such securities to the underlying rating of the respective security. Of the insured municipal securities in the Company's investment portfolio at December 31, 2012, approximately 99% were rated at A3 or above, and approximately 92% were rated at Aa3 or above, without the benefit of insurance. The Company believes that a loss of the benefit of insurance would not result in a material adverse impact on the Company's results of operations, financial position or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the Company's ability and intent to hold the securities. The average credit rating of the underlying issuers of these securities was "Aa2" at December 31, 2012. The average credit rating of the entire municipal bond portfolio was "Aa1" at December 31, 2012 with and without the enhancement provided by third-party insurance.
The following table shows the Company's Eurozone exposure at December 31, 2012 to all debt securities issued by foreign governments, financial companies, sovereign corporations (including sovereign banks) whose securities are backed by the respective country's government and all other
At December 31, 2012 and 2011, the "mortgage-backed securities, collateralized mortgage obligations and pass-through securities" and "asset-backed and other" categories in the foregoing table included collateralized mortgage obligations backed by alternative documentation mortgages and asset-backed securities collateralized by sub-prime mortgages with a collective fair value of $347 million and $351 million, respectively (comprising less than 1% of the Company's total fixed maturity investments at both dates). The continued disruption in secondary investment markets provided the Company with the opportunity to selectively acquire additional mortgage-backed securities at discounted prices in recent years. The Company purchased $11 million and $128 million of such securities in the years ended December 31, 2012 and 2011, respectively. The Company defines sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios. Alternative documentation securitizations are those in which the underlying loans primarily meet the government-sponsored entities' requirements for credit score but do not meet the government-sponsored entities' guidelines for documentation, property type, debt and loan-to-value ratios. The average credit rating on these securities and obligations held by the Company was "Ba1" and "Baa2" at December 31, 2012 and 2011, respectively.
Net pretax unrealized investment gains were $4.76 billion, $4.40 billion and $2.83 billion at December 31, 2012, 2011 and 2010, respectively. The Company's fixed maturities portfolio at December 31, 2012 and 2011 experienced an increase in valuation compared with the respective prior year-end, primarily due to the continuing decline in market interest rates.
investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:
Following are the pretax realized losses on investments sold during the year ended December 31, 2012:
analyses and various other factors to account for non-modeled losses to refine its proprietary view of catastrophe risk. These proprietary models are continually updated as new information emerges.
and Canadian exposures and include property exposures and workers' compensation exposures. The Company does not believe that the inclusion of hurricane or earthquake losses arising from other geographical areas or other exposures would materially change the estimated threshold loss amounts.
Severe weather events over the last several years have underscored the unpredictability of future climate trends and created uncertainty regarding insurers' exposures to financial loss as a result of catastrophes and other weather-related events. Some scientists believe that, in recent years, changing climate conditions have added to the unpredictability, frequency and severity of natural disasters. For example, in recent years hurricane activity has impacted areas further inland than previously experienced, thus expanding the Company's potential for losses from hurricanes. Additionally, both the frequency and severity of tornado and hail storms in the United States have been greater in recent years. Further, any reduction in arctic sea ice may contribute to rising sea levels that could impact flooding in coastal areas. Accordingly, if climate conditions are changing, the Company may be subject to increased losses from catastrophes and other weather-related events. Additionally, the Company's catastrophe models may be less reliable due to the increased unpredictability, frequency and severity of severe weather events.
The Company holds collateral, including trust agreements, escrow funds and letters of credit, under certain reinsurance agreements. The Company has also entered into Master Security Agreements with certain reinsurers. These agreements define conditions that require the reinsurer to provide collateral. The specific conditions and the amounts and form of collateral to be provided by these
agreements vary based on a number of factors including, but not limited to, the reinsurers' legal structure and trading history with the Company.
The $912 million decline in net reinsurance recoverables since December 31, 2011 primarily reflected the impact of cash collections, including commutation agreements, and the impact of net favorable prior year reserve development.
For a discussion of a pending reinsurance dispute pertaining to a portion of the Company's reinsurance recoverable from the Munich Re Group in the foregoing table, see note 16 of notes to the consolidated financial statements.
Given the possibility that more active weather patterns such as the Company experienced in a number of recent periods may continue, as well as the possibility that interest rates may remain low for some period of time, along with the current level of profitability in certain of its product lines, the Company has undertaken efforts to improve its underwriting margins. These efforts include seeking improved rates, as well as improved terms and conditions on many of its insurance products, and also include other initiatives, such as reducing operating expenses and acquisition costs. These efforts may not be successful and/or may result in lower retention and new business levels and therefore lower business volumes. In particular, in the Agency Automobile line of business, the Company has undertaken various actions to improve its underwriting margins, which have been negatively impacted by various factors. If these actions are not effective, the Company may need to explore other actions or initiatives to improve its competitive position and profitability in this line of business. Refer to "Part I-Item 1A - Risk Factors-The intense competition that we face could harm our ability to maintain or increase our business volumes and our profitability" in this report.
attained in the fourth quarter of 2012 and will be driven by both positive renewal rate changes and, subject to the economic uncertainties discussed below, growth in insured exposures. In the Financial, Professional & International Insurance segment, the Company expects that renewal premium changes will modestly improve during 2013 compared to the fourth quarter of 2012. With respect to construction surety, the Company expects written premium volume to be broadly consistent with the levels attained in 2012. In the Personal Insurance segment, the Company expects both Agency Automobile and Agency Homeowners and Other renewal premium changes during 2013 will decline slightly as compared to the fourth quarter of 2012, but are expected to remain positive and exceed underlying loss cost trends, assuming weather patterns consistent with the Company's expectations. Renewal premium changes for both Agency Automobile and Agency Homeowners and Other in 2013 are expected to be driven by both positive renewal rate changes (based on the Company's actions to file for rate increases) and, subject to the economic uncertainties discussed below, growth in insured exposures. The need for state regulatory approval for changes to personal property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.
The pricing environment for new business generally has less of an impact on underwriting profitability than renewal rate changes, given the volume of new business relative to renewal business. Property and casualty insurance market conditions are expected to remain competitive during 2013 for new business, not only in Business Insurance and Financial, Professional & International Insurance, but especially in Personal Insurance, where price comparison technology used by agents and brokers, sometimes referred to as "comparative raters," has facilitated the process of generating multiple quotes, and thereby increasing price comparison on new business and, increasingly, on renewal business. In addition, the Company launched a new distribution channel in 2009 that markets personal insurance products directly to consumers, which is expected to continue to generate modest growth in premium volume for Personal Insurance during 2013.
If weak economic conditions persist or deteriorate, the resulting low levels of economic activity could impact exposure changes at renewal and the Company's ability to write business at acceptable rates. Additionally, low levels of economic activity could adversely impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could adversely impact net written premiums during 2013, and, since earned premiums lag net written premiums, earned premiums could be adversely impacted following 2013.
Net investment income is a material contributor to the Company's results of operations. Interest rates remain at very low levels by historical standards. Based on the current interest rate environment,
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 "Item 1A - Risk Factors" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates" in this report.
The Company currently utilizes uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $392 million to provide much of the capital needed to support its obligations at Lloyd's. 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.
Net cash flows provided by operating activities were $3.23 billion, $2.17 billion and $3.05 billion in 2012, 2011 and 2010, respectively. Cash flows in 2012 primarily reflected a decrease in losses paid related to catastrophes, a lower level of paid losses related to asbestos claims and operations in runoff and a higher level of collected premiums, partially offset by an increase in paid losses related to non-catastrophe ongoing business (including the impact of increased loss costs). Cash flows in 2011 reflected an increase in losses paid related to catastrophes and ongoing business (including the impact of increased loss costs), a higher level of contributions to the Company's qualified domestic pension plan and lower receipts related to net investment income as compared with 2010. These factors were partially offset by a higher level of collected premiums, a lower level of paid operating expenses and a lower level of paid losses related to asbestos claims and operations in runoff. In the years ended December 31, 2012, 2011 and 2010, the Company contributed $217 million, $185 million and $35 million, respectively, to its qualified domestic pension plan.
Net cash flows used by investing activities in 2012 were $972 million, compared with net cash flows provided by investing activities of $1.15 billion and $2.11 billion in 2011 and 2010, respectively. The Company's consolidated total investments at December 31, 2012 increased by $1.14 billion from year-end 2011, driven by operating cash flows of $3.23 billion and a $362 million increase in net pretax unrealized appreciation of investments in 2012, partially offset by the impact of the Company's common share repurchases of $1.47 billion under its share repurchase authorization, common shareholder dividends of $694 million and debt repayments of $258 million.
then current Treasury rate (as defined) plus 15 basis points for the 2020 senior notes and 20 basis points for the 2040 notes.
The amount of debt obligations, other than commercial paper, that becomes due in 2013 is $500 million. In 2014, no debt obligations become due. In 2015, the amount of debt obligations, other than commercial paper, that comes due is $400 million. The Company may refinance maturing debt through funds generated internally or, depending on market conditions, through funds generated externally, including as a result of the issuance of debt or other securities.
Dividends. Dividends paid to shareholders were $694 million, $665 million and $673 million in 2012, 2011 and 2010, 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 January 22, 2013, the Company announced that it declared a regular quarterly dividend of $0.46 per share, payable March 29, 2013 to shareholders of record on March 8, 2013.
Total capitalization at December 31, 2012 was $31.76 billion, $673 million higher than at December 31, 2011 primarily reflecting the impact of net income of $2.47 billion and an increase in net unrealized appreciation of investments, partially offset by common share repurchases under the Company's share repurchase authorization totaling $1.45 billion, shareholder dividends of $700 million and debt repayments of $258 million.
Share Repurchase Authorization. At December 31, 2012, the Company had $2.16 billion of capacity remaining under its share repurchase authorization approved by the board of directors.
The table below includes the amount and estimated future timing of claims and claim-related payments. The amounts do not represent the exact liability, but instead represent estimates, generally utilizing actuarial projections techniques, at a given accounting date. These estimates include expectations of what the ultimate settlement and administration of claims will cost based on the Company's assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation or deflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the policyholder event and the time it is actually reported to the insurer. The future cash flows related to the items contained in the table below required estimation of both amount (including severity considerations) and timing. Amount and timing are frequently estimated separately. An estimation of both amount and timing of future cash flows
The contractual obligations related to debt, operating leases, purchase obligations, long-term unfunded investment commitments, estimated claims and claim-related payments (gross of the estimated reinsurance recoveries) and liabilities related to unrecognized tax benefits, at December 31, 2012 were as follows:
See note 8 of notes to the Company's consolidated financial statements for a further discussion of outstanding indebtedness. Because the amounts reported in the foregoing table include principal and interest, the total long-term debt obligations will not agree with the amounts reported in note 8.
(4)Includes commitments to vendors entered into in the ordinary course of business for goods and services including property, plant and equipment, office supplies, archival services, etc.
(7)Workers' compensation large deductible policies provide third party coverage in which the Company typically is responsible for paying the entire loss under such policies and then seeks reimbursement from the insured for the deductible amount. "Claims from large deductible policies" represent the estimated future payment for claims and claim related expenses below the deductible amount, net of the estimated recovery of the deductible. The liability and the related deductible receivable for unpaid claims are presented in the consolidated balance sheet as "contractholder payables" and "contractholder receivables," respectively. Most deductibles for such policies are paid directly from the policyholder's escrow which is periodically replenished by the policyholder. The payment of the loss amounts above the deductible are reported within "Claims and claim adjustment expenses" in the above table. Because the timing of the collection of the deductible (contractholder receivables) occurs shortly after the payment of the deductible to a claimant (contractholder payables), these cash flows offset each other in the table.
(10)The amounts in "Payout from ceded funds withheld" represent estimated payments for losses and return of funds held related to certain reinsurance arrangements whereby the Company holds a portion of the premium due to the reinsurer and is allowed to pay claims from the amounts held.
(11)The Company's current liabilities related to unrecognized tax benefits from uncertain tax positions are $657 million. Offsetting these liabilities are deferred tax assets of $594 million associated with the temporary differences that would exist if these positions become realized.
dividend that, together with other distributions made within the preceding twelve months, exceeds the greater of 10% of the insurer's capital and surplus as of the preceding December 31, or the insurer's net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices and by state regulation. This declaration or payment is further limited by adjusted unassigned surplus, as determined in accordance with statutory accounting practices. The insurance holding company laws of other states in which the Company's subsidiaries are domiciled generally contain similar, although in some instances somewhat more restrictive, limitations on the payment of dividends. A maximum of $2.05 billion is available by the end of 2013 for such dividends without prior approval of the Connecticut Insurance Department. The Company may choose to accelerate the timing within 2013 and/or increase the amount of dividends from its insurance subsidiaries in 2013, which could result in certain dividends being subject to approval by the Connecticut Insurance Department.
The Qualified Plan assets are managed to maximize long-term total return. The Company's overall strategy is to achieve a mix of approximately 85% to 90% of investments for long-term growth and 10% to 15% for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 55% to 65% equity securities and 20% to 40% fixed income securities, with the remainder allocated to short-term securities. For 2013, the Company plans to apply an expected long-term rate of return on plan assets of 7.50%, the same rate as in 2012. The rates of return reflect the Company's current expectations of long-term returns on the plan's invested assets, taking into account the current low level of long-term interest rates as well as the Federal Reserve's commentary in January 2013 regarding its expectation to maintain interest rates at their current low levels until the national unemployment rate drops to 6.5%. The Company's expected long-term rate of return on plan assets also contemplates a return to more normal levels of long-term interest rates in the future.
(including asbestos and environmental claims), partially offset by the increase in loss cost trends and catastrophe losses incurred in 2012.
Because 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.
There are also additional risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes, tornadoes and other catastrophic events can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability
•Estimating the number of large claims and their average values based on historical trends from prior accident periods, adjusted for the current environment and supplemented with actual data for the accident year analyzed to the extent available.
The methods described above are generally utilized to evaluate management's existing estimate for prior accident periods. For the initial estimate of the current accident year, the available claim data is typically insufficient to produce a reliable indication. Hence, the initial estimate for an accident year is generally based on a loss ratio projection method, which uses the earned premium for the current year multiplied by a projected loss ratio. The projected loss ratio is determined through an analysis of prior periods' experience, using loss trend, rate level differences, mix of business changes and other known or observed factors influencing the current accident year relative to prior accident years. The exact number of prior accident years utilized varies by product line component, based on the volume of business for that component and the reliability of an individual accident year estimate.
At least once per quarter, certain members of Company management meet with the Company's actuaries to review the latest claims and claim adjustment expense reserve analyses. Based on these
Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For some products this risk is mitigated by policy language such that the insured portion of defense costs erodes the amount of policy limit available to pay the claim. Such "defense within the limits" policies are most common for "claims-made" products. When defense costs are outside of the limits, amounts paid for defense costs do not erode the policy limits.
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for property, a 1% increase (decrease) in
Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -34% to -5% (averaging -18%) for the Company, and from -14% to 2% (averaging -9%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Commercial property reserves represent approximately 3% of the Company's total claims and claim adjustment expense reserves.
The reserving risk for this line is dominated by the liability coverage portion of this product, except occasionally in the event of catastrophic or large single losses. The reserving risk for this line differs from that of the general liability product line and the property product line due to the nature of the customer. Commercial multi-peril is generally sold to smaller-sized accounts, while the customer profile for general liability and commercial property includes larger customers.
As discussed above, this line combines general liability and commercial property coverages and it has been impacted in the past by many of the same events as those two lines.
Workers' compensation reserves are typically analyzed in three components: indemnity losses, medical losses and claim adjustment expenses.
•Degree of cost shifting between workers' compensation and health insurance, including Medicare
The Company's change in reserve estimate for this product line was -2% in 2012, 0% in 2011 and -1% for 2010. The 2012 change was primarily driven by better than expected frequency and severity related to lifetime medical claims for accident years 2008 and prior.
The Company's change in reserve estimate for this product line was -8% for 2012, -11% for 2011 and -6% for 2010. The 2012 change reflected better than expected results primarily for the contract surety line of business for accident years 2008 and prior. The 2011 change primarily reflected better than expected development for accident years 2008 and prior for the contract surety business. The 2010 change was driven by better than expected loss development due to lower than expected claim activity and loss severity, primarily for the contract surety business in this product line for the 2008 and prior accident years.
Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -9% to 3% (averaging -3%) for the Company, and from -4% to -1% (averaging -2%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line.
Historically, the one-year change in the reserve estimate for this product line (excluding the umbrella line of business, which for statutory reporting purposes is included with the general liability line of business) over the last nine years has varied from -31% to 3% (averaging -11%) for the Company, and from -8% to -2% (averaging -5%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Homeowners and personal lines other reserves represent approximately 4% of the Company's total claims and claim adjustment expense reserves.
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for International and other (excluding asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.2% increase (decrease) in claims and claim adjustment expense reserves. International and other reserves (excluding asbestos and environmental) represent approximately 7% of the Company's total claims and claim adjustment expense reserves.
The Company utilizes a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.
asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.
The Company also holds certain fixed maturity investments which are not priced by the pricing service and, accordingly, estimates the fair value of such fixed maturities using an internal matrix that is based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are the BofA Merrill Lynch U.S. Corporate Index and the BofA Merrill Lynch BB U.S. High Yield Index. The Company includes the fair value estimates of these corporate bonds in Level 2, since all significant inputs are market observable.
Due to the subjective nature of the Company's analysis and estimates of future cash flows, along with the judgment that must be applied in the analysis, it is possible that the Company could reach a different conclusion whether or not to impair a security if it had access to additional information about the issuer. Additionally, it is possible that the issuer's actual ability to meet contractual obligations may be different than what the Company determined during its analysis, which may lead to a different impairment conclusion in future periods.
For a discussion of other risks and uncertainties that could impact the Company's results of operations or financial position, see note 16 of notes to the Company's consolidated financial statements and "Item 1A - Risk Factors."
Consolidated Statement of Comprehensive Income for the years ended December 31, 2012, 2011 and
We have audited the accompanying consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In July 2012, the Financial Accounting Standards Board (FASB) issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
The updated guidance is effective for the quarter ending March 31, 2013, but early adoption was permitted. The Company adopted the updated guidance effective December 31, 2012, and such adoption did not have any effect on the Company's results of operations, financial position or liquidity.
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit's fair value and lead to the determination that it is more likely than not that the reporting unit's fair value is less than its carrying value, including goodwill. If an entity determines that it is more likely than not that a reporting unit's fair value is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the implied fair value of the reporting unit's goodwill in the same manner that goodwill is measured in a business combination. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The updated guidance was effective for the quarter ending March 31, 2012. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders' equity. The updated guidance requires that all nonowner changes in shareholders' equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.
The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively. The Company's adoption of this guidance resulted in a change in the presentation of the Company's consolidated financial statements but did not have any effect on the Company's results of operations, financial position or liquidity.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.
The Company's real estate investments include warehouses, office buildings and other commercial land and properties that are directly owned. Real estate is recorded on the purchase date at the purchase price, which generally represents fair value, and is supported by internal analysis or external appraisals that use discounted cash flow analyses and other acceptable valuation techniques. Real estate held for investment purposes is subsequently carried at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over the shorter of the expected useful life of the building or 39 years. Real estate held for sale is carried at lower of cost or fair value, less estimated costs to sell.
Also included in other investments are non-public common and preferred equities, mortgage loans, trading securities and derivatives. Non-public common and preferred equities are reported at fair value with changes in fair value, net of income taxes, charged or credited directly to other comprehensive income. Mortgage loans are carried at amortized cost. Trading securities are marked to market with the change in fair value recognized in net investment income during the current period. The Company's derivative financial instruments are carried at fair value, with the changes in fair value reflected in the consolidated statement of income in net realized investment gains (losses). For a further discussion of the derivatives used by the Company, see note 3.
Accrual of income is suspended on non-securitized fixed maturities or mortgage loans that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only when payments are received. Investments included in the consolidated balance sheet that were not income-producing for the preceding 12 months were not material.
For non-structured fixed maturities (U.S. Treasury securities, obligations of U.S. government and government agencies and authorities, obligations of states, municipalities and political subdivisions, debt securities issued by foreign governments, and certain corporate debt), the estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate
For structured fixed maturity securities (primarily residential and commercial mortgage-backed securities and asset-backed securities), the Company estimates the present value of the security by projecting future cash flows of the assets underlying the securitization, allocating the flows to the various tranches based on the structure of the securitization, and determining the present value of the cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). The Company incorporates levels of delinquencies, defaults and severities as well as credit attributes of the remaining assets in the securitization, along with other economic data, to arrive at its best estimate of the parameters applied to the assets underlying the securitization. In order to project cash flows, the following assumptions are applied to the assets underlying the securitization: (1) voluntary prepayment rates, (2) default rates and (3) loss severity. The key assumptions made for the Prime, Alt-A and first-lien Sub-Prime mortgage-backed securities at December 31, 2012 were as follows:
On at least an annual basis, the Company obtains independent appraisals for substantially all of its real estate investments. In addition, the carrying value of all real estate investments is reviewed for impairment on a quarterly basis or when events or changes in circumstances indicate that the carrying amount may not be recoverable. The review for impairment considers the valuation from the independent appraisal, when applicable, and incorporates an estimate of the undiscounted cash flows expected to result from the use and eventual disposition of the real estate property. An impairment loss is recognized if the expected future undiscounted cash flows are less than the carrying value of the real estate property. The impairment loss is the amount by which the carrying amount exceeds fair value.
Included in other investments are private equity limited partnerships, hedge funds and real estate partnerships that generally report investments on their balance sheet at fair value and are accounted for by the Company using the equity method of accounting. The Company reviews these investments for impairment no less frequently than quarterly and monitors the performance throughout the year through discussions with the managers/general partners. If the Company becomes aware of an impairment of a partnership's investments at the balance sheet date prior to receiving the partnership's financial statements, it will recognize an impairment by recording a reduction in the carrying value of the partnership with a corresponding charge to net investment income.
The Company may, from time to time, sell invested assets subsequent to the balance sheet date that it did not intend to sell at the balance sheet date. Conversely, the Company may not sell invested assets that it asserted that it intended to sell at the balance sheet date. Such changes in intent are generally due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the invested asset (e.g., a downgrade or upgrade from a rating agency), significant unforeseen changes in liquidity needs, or changes in tax laws or the regulatory environment.
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables. The allowance is based upon the Company's ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes,
Incremental direct costs of acquired new and renewal insurance contracts, consisting of commissions and premium-related taxes, are capitalized and charged to expense pro rata over the contract periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. Future investment income attributable to related premiums is taken into account in measuring the recoverability of the carrying value of this asset. All other acquisition expenses are charged to operations as incurred.
Intangible assets that are deemed to have a finite useful life are amortized over their useful lives. The carrying amount of intangible assets with a finite useful life is regularly reviewed for indicators of
Included in other liabilities in the consolidated balance sheet is the Company's estimate of its liability for guaranty fund and other insurance-related assessments. The liability for expected state guaranty fund and other premium-based assessments is recognized as the Company writes or becomes obligated to write or renew the premiums on which the assessments are expected to be based. The liability for loss-based assessments is recognized as the related losses are incurred. At December 31, 2012 and 2011, the Company had a liability of $297 million and $293 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $15 million and $19 million, respectively. The liability for such assessments and the related recoverables are not discounted for the time value of money. The loss-based assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers' compensation claimants and the recoveries are expected to occur over the same period of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance contracts, primarily workers' compensation, are participating whereby dividends are paid to policyholders in accordance with contract provisions. Net written premiums for participating dividend policies were approximately 2% of total net written premiums for the year ended December 31, 2012, and approximately 1% of total net written premiums for each of the years ended December 31, 2011
and 2010, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled $59 million and $54 million at December 31, 2012 and 2011, respectively.
The Company's U.S. insurance subsidiaries, domiciled principally in the state of Connecticut, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority. The impact of any permitted accounting practices on policyholders' surplus of the Company is not material.
•Technology serves small to large companies involved in telecommunications, information technology, medical technology and electronics manufacturing, offering a comprehensive portfolio of products and services. Products offered include commercial property, commercial auto, general liability, workers' compensation, umbrella, internet liability, technology errors and omissions coverages and global companion products.
•Public Sector Services provides insurance products and services to public entities including municipalities, counties, Indian Nation gaming organizations and selected special government districts such as water and sewer utilities. The policies written by this unit typically cover commercial property, commercial auto, general liability, professional liability and workers' compensation exposures.
•Oil & Gas provides specialized property and liability products and services for customers involved in the exploration and production of oil and natural gas, including operators and drilling contractors, as well as various service and supply companies and manufacturers that support upstream operations. The policies written by this business group cover risks including physical damage, liability, business interruption and workers' compensation.
•Agribusiness serves small to medium-sized agricultural businesses, including farms, ranches, wineries and related operations, offering property and liability coverages other than workers' compensation.
•Boiler & Machinery serves small to large companies, offering comprehensive breakdown coverages for equipment, including property and business interruption coverages. Through the BoilerRe unit, Boiler & Machinery also serves other property and casualty carriers that do not have in-house expertise with reinsurance, underwriting, engineering, claim handling and risk management services for this type of coverage.
Business Insurance also includes the Special Liability Group (which manages the Company's asbestos and environmental liabilities) and the assumed reinsurance and certain other runoff operations, which collectively are referred to as Business Insurance Other.
•Bond & Financial Products provides a wide range of customers with bond and insurance products and risk management services. The range of coverages includes performance, payment and commercial surety and fidelity bonds for construction and general commercial enterprises; management liability coverages for losses caused by the actual or alleged negligence or misconduct of directors and officers or employee dishonesty; employment practices liability coverages and fiduciary coverages for public corporations, private companies and not-for-profit organizations; professional liability coverage for actual or alleged errors and omissions committed in the course of professional conduct or practice for a variety of professionals including, among others, lawyers, design professionals and real estate agents; and professional and management liability, property, workers' compensation, auto and general liability and fidelity insurance for financial institutions.
The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals' personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.
Homeowners policies provide protection against losses to dwellings and contents from a variety of perils (excluding flooding) as well as coverage for personal liability. The Company writes homeowners insurance for dwellings, condominiums and tenants, and rental properties. The Company writes coverage for boats and yachts and valuable personal items such as jewelry, and also writes coverages for umbrella liability, identity fraud, and weddings and special events.
The following tables summarize the components of the Company's revenues, operating income (loss) and total assets by reportable business segments:
(1)The primary component of Interest Expense and Other was after-tax interest expense of $246 million, $251 million and $252 million in 2012, 2011 and 2010, respectively. Interest Expense and Other in 2010 included $39 million of after-tax expenses related to the Company's purchase and retirement of a significant portion of its 6.25% fixed-to-floating rate junior subordinated debentures.
Pre-refunded bonds of $9.03 billion and $7.33 billion at December 31, 2012 and 2011, respectively, were bonds for which an irrevocable trust (almost exclusively comprised of U.S. Treasury securities) has been established to fund the remaining payments of principal and interest.
The Company's fixed maturity investment portfolio at December 31, 2012 and 2011 included $3.00 billion and $3.52 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMO). Included in the totals at December 31, 2012 and 2011 were $1.44 billion and $1.82 billion, respectively, of GNMA, FNMA and FHLMC (excluding FHA project loans) guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.56 billion and $1.70 billion, respectively. Approximately 43% and 38% of the Company's CMO holdings were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC at December 31, 2012 and 2011, respectively. The average credit rating of the $893 million and $1.05 billion of non-guaranteed CMO holdings at December 31, 2012 and 2011, respectively, was "B2" and "Ba1," respectively. The average credit rating of all of the above securities was "A1" and "Aa3" at December 31, 2012 and 2011, respectively.
Proceeds from sales of fixed maturities classified as available for sale were $1.09 billion, $1.16 billion and $3.71 billion in 2012, 2011 and 2010, respectively. Gross gains of $70 million, $63 million and $106 million and gross losses of $9 million, $10 million and $11 million were realized on sales and other fixed maturity-related transactions (excluding impairments) in 2012, 2011 and 2010, respectively.
In 2010, the Company also sold a portion of its investment in Verisk that was classified as an "other investment" at the time of sale due to transfer restrictions that were scheduled to expire after one year. Proceeds from that sale of Verisk shares in 2010 were $115 million. Gross gains realized on that sale were $103 million.
The Company is a passive investor in limited partner equity interests issued by third party VIEs. These include certain of the Company's investments in private equity limited partnerships, hedge funds and real estate partnerships where the Company is not related to the general partner. These investments are generally accounted for under the equity method and reported in the Company's consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary.
The following tables summarize, for all investments in an unrealized loss position at December 31, 2012 and 2011, 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. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1, in determining whether such investments are other-than-temporarily impaired.
Included in fixed maturities are below investment grade assets totaling $2.05 billion and $1.96 billion at December 31, 2012 and 2011, respectively. The Company defines its below investment grade assets as those securities rated below investment grade by external rating agencies, or the equivalent by the Company when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds that are classified as below investment grade loans.
In 2010, the Company recorded a net realized investment gain of $5 million related to its holdings of six million stock purchase warrants of Platinum Underwriters Holdings, Ltd., a publicly-held company. These warrants were not designated and did not qualify for hedge accounting, and, as such, the mark-to-market changes in fair value were reflected in net realized investment gains. In October 2010, the Company sold these stock purchase warrants for proceeds that approximated their carrying value at the date of sale.
The Company purchases investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in net realized investment gains. Derivatives embedded in convertible debt securities are reported on a combined basis with their host instrument and are classified as fixed maturity securities. The Company recorded net realized investment losses of less than $1 million in 2012, and $2 million and $1 million in 2011 and 2010, respectively, related to these embedded derivatives.
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:
relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.
The Company holds investments in various publicly-traded securities which are reported in other investments. These investments include securities in the Company's trading portfolio, mutual funds and other small holdings. The $46 million and $42 million fair value of these investments at December 31, 2012 and 2011, respectively, was disclosed in Level 1. At December 31, 2012 and 2011, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $54 million and $44 million, respectively, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at December 31, 2012 and 2011 in the amount disclosed in Level 3.
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 December 31, 2012 and
2011. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.
The Company did not have any material transfers between Levels 1 and 2 during the year ended December 31, 2012.
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2012 and 2011.
(2)During the year ended December 31, 2011, approximately $81 million of municipal fixed maturity securities were valued using observable market data which resulted in a transfer out of Level 3 into Level 2. In prior periods, these securities were valued internally using unobservable inputs.
The Company uses various financial instruments in the normal course of its business. The Company's insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below. The following tables present the carrying value and fair value of the Company's financial assets and financial liabilities disclosed, but not carried, at fair value at December 31, 2012 and 2011, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis.
The Company utilized a pricing service to estimate fair value for approximately 95% and 94% of short-term securities at December 31, 2012 and 2011, respectively. A description of the process and inputs used by the pricing service to estimate fair value is discussed in the "Fixed Maturities" section above. Estimates of fair value for U.S. Treasury securities and money market funds are based on market quotations received from the pricing service and are disclosed in Level 1 of the hierarchy. The fair value of other short-term fixed maturity securities is estimated by the pricing service using observable market inputs and is disclosed in Level 2 of the hierarchy. For short-term securities where an estimate is not obtained from the pricing service, the carrying value approximates fair value and is included in Level 3 of the hierarchy.
The Company utilized a pricing service to estimate fair value for 100% of its debt, including commercial paper, at both December 31, 2012 and 2011. The pricing service utilizes market quotations for debt that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the fair value estimates are based on market observable inputs and disclosed at Level 2 in the hierarchy. For the small amount of the Company's
debt securities for which a pricing service is not used, the Company utilizes pricing estimates from a nationally recognized broker/dealer to estimate fair value. If estimates of fair value are unavailable from the pricing service or the broker/dealer, the Company produces an estimate of fair value based on internally developed valuation techniques which are based on a discounted cash flow methodology and incorporates all available relevant observable market inputs. Estimates of fair value developed internally and from broker quotes are disclosed in Level 3 of the hierarchy.
Ceded premiums included the premiums paid to Longpoint Re Ltd., Longpoint Re II Ltd. and Long Point Re III Ltd. for coverage under the Company's catastrophe bond programs.
The deductible for any calendar year is equal to 20% of the insurer's direct earned premiums for covered lines for the preceding calendar year. The Company's estimated deductible under the Program is $2.26 billion for 2013. The annual cap limits the amount of aggregate subject losses for all participating insurers to $100 billion. Once subject losses have reached the $100 billion aggregate during a program year, participating insurers will not be liable under the Program for additional covered terrorism losses for that program year. The Company has had no terrorism-related losses since the Program was established. Since the law is untested, there is substantial uncertainty as to how it will be applied to specific circumstances. It is also possible that future legislative action could change the Program. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company's own reinsurance program, future losses from acts of terrorism, particularly involving nuclear, biological, chemical or radiological events, could be material to the Company's operating results, financial position and/or liquidity in future periods. While the Company seeks to manage its exposure to man-made catastrophic events involving conventional means, there can be no assurance that the Company would have sufficient resources to respond to claims arising out of one or more man-made catastrophic events involving nuclear, biological, chemical or radiological means.
The following table presents the carrying amount of the Company's goodwill by segment at December 31, 2012 and 2011:
(1)Certain intangible assets related to renewal rights became fully amortized during the first quarter of 2012.
(2)The fair value adjustment of $191 million was recorded in connection with the merger of The St. Paul Companies, Inc. and Travelers Property Casualty Corp. in 2004 and was 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 adjustment is reported as an other intangible asset 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 asset is 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 asset 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.
Intangible asset amortization expense is estimated to be $45 million in 2013, $43 million in 2014, $23 million in 2015, $9 million in 2016 and $8 million in 2017.
Gross claims and claim adjustment expense reserves at December 31, 2012 and 2011 decreased by $465 million and $184 million from the respective prior year-end, primarily reflecting the impact of net favorable prior year reserve development as well as payments related to operations in runoff, including asbestos and environmental claims, partially offset by the increase in loss cost trends. Additionally, the decrease in reserves at December 31, 2011 from the prior year-end was partially offset by the impact of significant catastrophe losses incurred in 2011.
In 2012, estimated claims and claim adjustment expenses incurred included $1.07 billion of net favorable development for claims arising in prior years, including $940 million of net favorable prior year reserve development impacting the Company's results of operations and $48 million of accretion of discount.
Business Insurance. Net favorable prior year reserve development of $467 million in 2012 was concentrated in the general liability product line for accident years 2010 and prior (excluding increases to asbestos and environmental reserves discussed below), which reflected what the Company believes are more favorable legal and judicial environments than what the Company previously expected; the commercial property product line primarily for accident years 2009 through 2011, driven by higher than expected subrogation and salvage recoveries and by favorable loss development related to catastrophe losses incurred in 2011; and the workers' compensation product line, primarily driven by better than expected frequency and severity related to lifetime medical claims for accident years 2008 and prior. Lower than expected claim department expenses also contributed to net favorable prior year reserve development in 2012. These factors were partially offset by $167 million and $90 million increases to asbestos and environmental reserves, respectively, which are discussed in further detail in the "Asbestos and Environmental Reserves" section below, net unfavorable prior year reserve development in the commercial automobile line of business, driven by higher than expected severity in the bodily injury coverage primarily for accident years 2010 and 2011, and net unfavorable prior year reserve development in the general liability product line for the 2011 accident year resulting from higher than expected claim frequency.
Financial, Professional & International Insurance. Net favorable prior year reserve development in 2012 was $298 million. In Bond & Financial Products, net favorable prior year reserve development in 2012 reflected better than expected results in the surety product line primarily for the contract surety business for accident years 2008 and prior, and better than expected results for management liability business primarily for the errors & omissions and fiduciary products for accident years 2007 and prior. In International, net favorable prior year reserve development in 2012 occurred in several lines of business in Canada and in the Company's operations at Lloyd's, partially offset by an $8 million increase to asbestos reserves.
Business Insurance. Net favorable prior year reserve development in 2011 was $245 million, primarily driven by better than expected loss development in the general liability product line (excluding increases to asbestos and environmental reserves discussed below) which was concentrated in excess coverages for accident years 2005 through 2008 and reflected what the Company believes are
In 2010, estimated claims and claim adjustment expenses incurred included $1.42 billion of net favorable development for claims arising in prior years, including $1.25 billion of net favorable prior year reserve development impacting the Company's results of operations and $45 million of accretion of discount.
Business Insurance. Net favorable prior year reserve development in 2010 totaled $901 million, driven by better than expected loss development in the commercial property, general liability (excluding increases to asbestos and environmental reserves discussed below) and workers' compensation product lines for multiple accident years, as well as in assumed reinsurance, which is in runoff. The commercial property product line improvement primarily occurred in the 2008 and 2009 accident years as a result of better than expected loss development in Industry-Focused Underwriting and Target Risk Underwriting. The general liability product line improvement was concentrated in excess coverages for accident years 2006 and prior and reflected what the Company believes are more favorable legal and judicial environments than what the Company previously expected. Net favorable prior year reserve development in the workers' compensation product line was concentrated in accident years 2007 and prior and resulted from better than expected loss development. The improvement in assumed
During 2012, total gross and net asbestos-related payments decreased when compared with 2011, primarily resulting from a decline in both gross and net payments to policyholders with whom the Company has entered into settlement agreements. The Home Office and Field Office categories, which account for the vast majority of policyholders with active asbestos-related claims, experienced a modest reduction in gross asbestos-related payments during 2012 when compared with 2011, while net asbestos payments were flat. Payments on behalf of policyholders in these categories continue to be influenced by the high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury continue to target previously peripheral defendants. The number of policyholders tendering asbestos claims for the first time in 2012 and the number of policyholders with open asbestos claims both increased slightly when compared with 2011.
Net asbestos losses paid in 2012, 2011 and 2010 were $236 million, $284 million and $350 million, respectively. Approximately 6%, 19% and 32% of total net paid losses in 2012, 2011 and 2010,
respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company's liability.
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 at December 31, 2012 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. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company's previous assessment of these claims, the number and outcome
There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage and business income interruption costs; and reinsurance collectibility. The timing of a catastrophe's occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.
Commercial Paper-The Company maintains an $800 million commercial paper program, supported by a $1.0 billion bank credit agreement that expires on June 10, 2013. (See "Line of Credit
Agreement" discussion that follows). Interest rates on commercial paper issued in 2012 ranged from 0.1% to 0.2%, and in 2011 ranged from 0.1% to 0.3%.
The Travelers Companies, Inc. fully and unconditionally guarantees the payment of all principal, premiums, if any, and interest on certain debt obligations of its subsidiaries TPC and Travelers Insurance Group Holdings Inc. (TIGHI). The guarantees pertain to the $500 million 5.00% notes due 2013, the $200 million 7.75% notes due 2026 and the $500 million 6.375% notes due 2033.
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, common share price, catastrophe losses, 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), market conditions and other factors. The following table summarizes repurchase activity in 2012 and remaining repurchase capacity at December 31, 2012.
The Company's U.S. insurance subsidiaries, domiciled principally in the state of Connecticut, are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid by each insurance subsidiary to its respective parent company without prior approval of insurance regulatory authorities. A maximum of $2.05 billion is available by the end of 2013 for such dividends without prior approval of the Connecticut Insurance Department. The Company may choose to accelerate the timing within 2013 and/or increase the amount of dividends from its insurance subsidiaries in 2013, which could result in certain dividends being subject to approval by the Connecticut Insurance Department.
The holding company received $1.96 billion of dividends in 2012, all of which was received from its U.S. insurance subsidiaries.
Statutory net income of the Company's domestic and international insurance subsidiaries was $2.84 billion, $1.50 billion and $3.69 billion for the years ended December 31, 2012, 2011 and 2010, respectively. Policyholder surplus of the Company's domestic and international insurance subsidiaries was $20.05 billion and $19.17 billion at December 31, 2012 and 2011, respectively.
The following table presents the pretax components of the Company's other comprehensive income and the related income tax expense (benefit) for the years ended December 31, 2012, 2011 and 2010.
The following table presents the pretax and related income tax expense (benefit) components of the amounts reclassified from the Company's accumulated other comprehensive income to the Company's consolidated statement of income for the years ended December 31, 2012, 2011 and 2010.
Included in the balances at December 31, 2012 and 2011 were $3 million and $2 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $21 million and $35 million, respectively, of tax positions for which the ultimate deductibility is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility would not affect the annual effective tax rate.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2012 and 2011, the Company recognized approximately $46 million and $(122) million in interest, respectively. The Company had approximately $94 million and $48 million accrued for the payment of interest at December 31, 2012 and 2011, respectively.
On February 5, 2013, the Company, under the 2004 Stock Incentive Plan, granted 1,861,434 stock option awards with an exercise price of $78.65 per share. The fair value attributable to the stock option awards on the date of grant was $17.09 per share.
The Company also has a Performance Share Awards Program pursuant to the 2004 Incentive Plan which became effective beginning in 2006. Under the program, the Company may issue performance share awards to certain employees of the Company who hold positions of Vice President (or its equivalent) or above. The performance awards provide the recipient the right to earn shares of the Company's common stock based upon the Company's attainment of certain performance goals. The performance goals for performance awards are based on the Company's adjusted return on equity over a three-year performance period. Vesting of any performance shares is contingent upon the Company attaining the relevant performance period minimum threshold return on equity. If the performance period return on equity is below the minimum threshold, none of the shares will vest. If performance meets or exceeds the minimum performance threshold, a range of performance shares will vest (50%-160% for awards granted prior to and including February 2009; 50%-150% for awards granted in February 2010; and 50%-130% for awards granted in February 2011, 2012 and 2013); depending on the actual return on equity attained.
The total fair value of shares that vested during the years ended December 31, 2012, 2011 and 2010 was $146 million, $121 million and $113 million, respectively.
(2)Reflects the number of performance shares attributable to the performance goals attained over the completed performance period (three years) and for which service conditions have been met.
Cash received from the exercise of employee stock options under share-based compensation plans totaled $295 million and $314 million in 2012 and 2011, respectively. The tax benefit realized for tax deductions from employee stock options exercised during 2012 and 2011 totaled $36 million and $30 million, respectively.
The Company sponsors a qualified non-contributory defined benefit pension plan, which covers substantially all U.S. domestic employees and provides benefits under a cash balance formula, except that employees satisfying certain age and service requirements remain covered by a prior final average pay formula. In addition, the Company sponsors: a nonqualified defined benefit pension plan which
Effective January 1, 2013, the Company converted its current prescription drug program for Medicare-eligible retirees to a group-based company-sponsored Medicare Part D Employer Group Waiver Plan (EGWP) program. The EGWP structure was made financially attractive for companies due to changes stemming from health care reform legislation. Under EGWP, the federal direct capitation payments will be paid to the Company while the federal reinsurance and pharmaceutical rebates will be used to offset claims. The Company estimates that the transition to EGWP will lower prescription drug liabilities by approximately $31 million.
For pension plans with an accumulated benefit obligation in excess of plan assets, the aggregate projected benefit obligation was $3.25 billion and the aggregate accumulated benefit obligation was $3.20 billion at December 31, 2012. The fair value of plan assets for the above plans was $2.85 billion and $2.49 billion at December 31, 2012 and 2011, respectively.
The Company has discretion regarding whether to provide additional funding and when to provide such funding to its qualified pension plan. In 2012, 2011 and 2010, the Company voluntarily made contributions totaling $217 million, $185 million and $35 million, respectively, to the qualified pension plan. The Company has not determined whether or not additional funding will be made during 2013. There is no required contribution to the qualified pension plan during 2013.
The following table summarizes the components of net periodic benefit cost and other amounts recognized in other comprehensive income related to the benefit plans for the years ended December 31, 2012, 2011 and 2010.
For the defined benefit pension plans, the estimated net actuarial loss that will be reclassified (amortized) from accumulated other comprehensive income into net income as part of net periodic benefit cost over the next fiscal year is $107 million, and there is no estimated prior service benefit to be amortized over the next fiscal year. For the postretirement benefit plans, the estimated net actuarial loss that will be reclassified (amortized) from accumulated other comprehensive income into net income as part of net periodic benefit cost over the next fiscal year is less than $1 million, and the estimated prior service cost to be amortized over the next fiscal year is $3 million.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have increased the accumulated postretirement benefit obligation by $22 million at December 31, 2012, and the aggregate of the service and interest cost components of net postretirement benefit expense by $1 million for the year ended December 31, 2012. Decreasing the assumed health care cost trend rate by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2012 by $19 million and the aggregate of the service and interest cost components of net postretirement benefit expense by $1 million for the year ended December 31, 2012.
The Company's overall investment strategy is to achieve a mix of approximately 85% to 90% of investments for long-term growth and 10% to 15% for near-term benefit payments with a wide diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 55% to 65% equity securities and 20% to 40% fixed income securities, with the remainder allocated to short-term securities. Equity securities primarily include investments in large, medium and small-cap companies primarily located in the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities, U.S. Treasury securities and debt securities issued by foreign governments. Other investments include two private equity funds held by the Company's qualified defined benefit pension plan. One private equity fund is focused on financial companies, and the other is focused on real estate-related investments. Other investments at December 31, 2011 also included a hedge fund which was a multi-strategy "fund of funds."
(1)The fair value estimates of the hedge fund and two private equity funds comprising these investments are determined by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the total fair value estimates are disclosed in Level 3.
The following table presents the changes in the Level 3 fair value category for the years ended December 31, 2012 and 2011.
Rent expense was $192 million, $191 million and $206 million in 2012, 2011 and 2010, respectively.
Future minimum annual rental payments under noncancellable operating leases for 2013, 2014, 2015, 2016 and 2017 are $164 million, $141 million, $118 million, $95 million and $59 million, respectively, and $89 million for 2018 and thereafter. Future sublease rental income aggregating approximately $6 million will partially offset these commitments.
In the ordinary course of its insurance business, the Company has received and continues to receive claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation, including, among others, the litigation described below. The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcomes of these disputes are uncertain. In this regard, the Company employs dedicated specialists and aggressive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances.
On March 22, 2010, the Second Circuit issued an opinion in which it found that the notice of the 1986 Orders provided to one remaining objector was insufficient to bar contribution claims by that objector against TPC. TPC's Petition for Rehearing and Rehearing En Banc were denied May 25, 2010 and, its Petition for Writ of Certiorari and Petition for a Writ of Mandamus were denied by the United States Supreme Court on November 29, 2010.
Ohio state court, which have been dismissed following favorable rulings by Ohio trial and appellate courts. From time to time, SPC and/or its subsidiaries have been named in similar individual direct actions in other jurisdictions.
Broker Anti-Trust Litigation-In 2005, four putative class action lawsuits were brought against a number of insurance brokers and insurers, including the Company, by plaintiffs who allegedly purchased insurance products through one or more of the defendant brokers. The plaintiffs alleged that various insurance brokers conspired with each other and with various insurers, including the Company, to artificially inflate premiums, allocate brokerage customers and rig bids for insurance products offered to those customers. To the extent they were not originally filed there, the federal class actions were transferred to the U.S. District Court for the District of New Jersey and were consolidated for pre-trial proceedings with other class actions under the caption In re Insurance Brokerage Antitrust Litigation. On August 1, 2005, various plaintiffs, including the four named plaintiffs in the above-referenced class actions, filed an amended consolidated class action complaint naming various brokers and insurers, including the Company, on behalf of a putative nationwide class of policyholders. The complaint included causes of action under the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO), state common law and the laws of the various states prohibiting antitrust violations. The complaint sought monetary damages, including punitive damages and trebled damages, permanent injunctive relief, restitution, including disgorgement of profits, interest and costs, including attorneys' fees. All defendants moved to dismiss the complaint for failure to state a claim. After giving plaintiffs multiple opportunities to replead, the court dismissed the Sherman Act claims on August 31, 2007 and the RICO claims on September 28, 2007, both with prejudice, and declined to exercise supplemental jurisdiction over the state law claims. The plaintiffs appealed the district court's decisions to the U.S. Court of Appeals for the Third Circuit. On August 16, 2010, the Third Circuit affirmed the district court's dismissal of all Sherman Act and RICO claims against certain defendants, including the Company, except for Sherman Act and RICO claims involving the sale of excess casualty insurance through a single defendant broker, as well as all state law claims, which they remanded to the district court for further proceedings. On October 1, 2010, defendants, including the Company, filed renewed motions to dismiss the remanded claims. On March 18, 2011, the Company and certain other defendants entered into an agreement with the plaintiffs to settle the lawsuit, under which the Company agreed to pay $6.75 million. Preliminary approval of the settlement was granted on June 27, 2011. On September 14, 2011, the court conducted a final fairness hearing, and on March 30, 2012, the court granted final approval of the settlement. On April 27, 2012, three members of the settlement class appealed the court's order granting final approval of the settlement to the U.S. Court of Appeals
Other-In addition to those described above, the Company is involved in other lawsuits, including lawsuits alleging extra-contractual damages relating to insurance contracts or reinsurance agreements, that do not arise under insurance contracts or reinsurance agreements. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.
settlement proceeds among the class members. On December 21, 2011, the court entered an order granting final approval of the settlement, and on February 28, 2012, the district court issued a written opinion regarding its approval of the settlement. On March 27, 2012, three parties who objected to the settlement appealed the court's orders approving the settlement to the U.S. Court of Appeals for the Seventh Circuit. On January 11, 2013, all parties, including the three parties who had objected to the settlement, filed a Stipulation of Dismissal indicating that there were no longer any objections to the settlement. All parties are awaiting an order from the Seventh Circuit in response to the Stipulation of Dismissal. The Company anticipates that its allocation from the settlement fund, in the event the settlement becomes final, will be approximately $90 million. This amount is treated for accounting purposes as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly will be recognized in the Company's consolidated financial statements during the period in which it is received by the Company.
In the ordinary course of selling business entities to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the business entities being sold, covenants and obligations of the Company and/or its subsidiaries following the closing, and in certain cases obligations arising from undisclosed liabilities, adverse reserve development, imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law, or certain named litigation. Such indemnification provisions generally survive for periods ranging from seven years following the applicable closing date to the expiration of the relevant statutes of limitations, although, in some cases, there may be other agreed upon term limitations or no term limitations. Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments. The maximum amount of the Company's contingent obligation for indemnifications related to the sale of business entities that are quantifiable was $471 million at December 31, 2012, of which $9 million was recognized on the balance sheet at that date.
obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at December 31, 2012, all of which is indemnified by a third party.
There were no material noncash financing or investing activities during the years ended December 31, 2012, 2011 and 2010.
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. has fully and unconditionally guaranteed certain debt obligations of TPC, its wholly-owned subsidiary, which totaled $1.20 billion at December 31, 2012.
(1)Total other-than-temporary impairment (OTTI) for the year ended December 31, 2012, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (OCI) were as follows:
(1)Total other-than-temporary impairment (OTTI) for the year ended December 31, 2010, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (OCI) were as follows: