The Travelers Companies Annual Report 2016

FY2016 Annual Report · The Travelers Companies
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2016 Annual Report

“ Our clarity of mission, and the single-mindedness 
with which we pursue it, has produced another 
year of strong ﬁ nancial results.” 

ALAN D. SCHNITZER

Chief Executive Oﬃ  cer

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To Our Shareholders

Last year’s annual letter to shareholders was my ﬁ rst as 
Chief Executive Oﬃ  cer. Sadly, since then we lost our dear 
friend and long-time champion, Jay Fishman. 

Last November, we dedicated the rebuilt plaza in front 
of our Hartford campus as the Jay Fishman Plaza. Today, 
our employees walk through that plaza, past the iconic 
red umbrella that Jay loved so much and into a company 
that still very much bears his mark. A company that 
provides people and businesses with the peace of mind 
to reach higher and achieve more. A company that takes 
pride in being a great place to work for the best talent 
in the business. A company that is committed to the 
communities in which we live and work. And a company 
that draws strength but not satisfaction from what we have 
accomplished, because we know that there is so much 
more ye t to achieve. All of this serves as the foundation for 
our mission: to create shareholder value. 

Among other things, I used last year’s letter as an 
opportunity to discuss our top-down consistent and 

successful ﬁ nancial strategy and our bottom-up granular 
and deliberate execution. I discussed our franchise value, 
barriers to entry in the markets that we serve and our 
approach to acquisitions. I explained why we think return 
on equity is the right lens for managing the business. I 
addressed creating value in a changing world and building 
for the next successful decade. In short, that letter was 
meant to be foundational and the views I expressed 
in it enduring.

I also said in that letter, “our most ﬁ tting tribute to Jay’s 
leadership is to carry forward the success he made possible, 
and to turn today’s summit into tomorrow’s base camp.” In 
this year’s letter, I discuss the successful ﬁ rst year of that 
trek and give some insight into how we’re positioning for 
the next leg of the journey.

Financial overview
In 2016,  we continued our long track record of delivering 
industry-leading returns to our shareholders with another 
year of strong ﬁ nancial results. Our operating return on 

Dedication of the Jay Fishman Plaza
November 2016

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2016

$24.958 BILLION 
Record Net Written Premiums

92.0% 
Combined Ratio

$3.014 BILLION 
Net Income

$3.234 BILLION 
Capital Returned to Shareholders

12.5% 
Return on Equity

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equity was 13.3%,* consistent with the average annual 
operating return on equity we have achieved over 
the last 10 years, despite the historically low interest rate 
environment. These returns, which represent a meaningful 
spread over both the 10-year Treasury and our cost 
of equity, are no accident. We underwrite both sides of 
our balance sheet deliberately and with a risk-adjusted 
return in mind.

Our solid underwriting and investment results in 2016 
demonstrate the continued successful execution of 
our long-term ﬁ nancial strategy. Travelers’ simple and 
unwavering mission for creating shareholder value is to: 

•  Deliver superior returns on equity by leveraging our 

competitive advantages;

•  Generate earnings and capital substantially in excess 

of our growth needs; and

•  Thoughtfully rightsize capital and grow book value 

per share over time.

We deﬁ ned “superior returns” many years ago as a mid-
teens operating return on equity over time. We emphasize 
that the objective is measured over time because we 

recognize that weather, reserve development and interest 
rates, among other factors, impact our results from year to 
year, and that there are years — or longer periods — and 
environments in which a mid-teens return is not attainable 
and other years in which we expect we will achieve or 
exceed a mid-teens return. As we’ve said before, our ability 
to achieve a mid-teens return over time going forward will 
depend on interest rates returning to more normal levels by 
historical standards.

Our clarity of mission, and the single-mindedness with 
which we pursue it, has produced another year of strong 
ﬁ nancial results, capping oﬀ  a decade of industry-leading 
returns on equity. Over the last ten years, we also grew 
dividends per share at an average annual rate of 10% and 
increased our book value per share by 125% after returning 
nearly $37 billion of excess capital to our shareholders. 
Finally, over the same period, we delivered a total return to 
shareholders of 193%.

In this letter las t year, I observed that after a decade of 
industry-leading success, we were positioned to carry 
forward that success and to innovate and lead. With 
that in mind, let’s take a look at the ﬁnancial results we 
achieved in 2016. 

RETURN ON EQUITY

Travelers

U.S. P&C Insurers1

20%

15%

10%

5%

0%

12.5%*

5.5%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

1 Average GAAP return on equity from Insurance Information Institute for 2007–2016; 2016 is an estimate.

* See “Additional information” for a discussion and calculation of return on equity and operating return on equity.

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2016 results
In 2016, we posted strong net income of $3.014 billion 
and net income per diluted share of $10.28. We delivered 
excellent underwriting results across our business 
segments, with a consolidated combined ratio of 92.0%, 
demonstrating the value of our competitive advantage in 
underwriting excellence and the impact of industry-leading 
data and analytics, which are decades in the making and are 
continually improving. We also generated record net written 
premiums of $24.958 billion in 2016, up 3.5% year-over-year. 

Each of our business segments contributed to the growth we 
achieved and more broadly to our solid 2016 performance. 

Business and International Insurance posted strong full-year 
ﬁ nancial and production results and continued to generate 
excellent returns, achieving a combined ratio of 94.3% 
for the year. The segment’s results also beneﬁ ted from 
our very successful settlement of a reinsurance dispute, 
which contributed a $126 million pre-tax gain ($82 million 
after-tax). Our ability to manage complex litigation on 
behalf of our insureds and our shareholders is an important 
strategic capability. 

In domestic Business Insurance, given the successful 
execution of our strategy going back to 2010 to improve 
underwriting proﬁ tability, our strategy durin g 201 6  was to 
continue to focus on retaining our more proﬁ table business 
and successfully achieving rate gains where needed, while 
actively seeking attractive new business opportunities. 
I couldn’t be more pleased with our execution. Retention 
was at a historically high level, and we achieved positive 
rate change. We were also able to generate signiﬁ cant 
new business premiums. Production results were also 
strong in our International business, including as a result 
of our new global construction and renewable energy 
businesses at Lloyd’s. 

In Bond & Specialty Insurance, the underlying combined 
ratio of 79.7% was an all-time best, marking another year 
of exceptional results. We achieved these results through 
disciplined underwriting, aggressive management of risk 
and limits, and strong account and agency relationships, 
along with superior analytics and claims management. 
The Management Liability portfolio produced record 

retention levels and higher levels of new business 
as compared to 2015. Among other highlights, our 
successful Private/Non-Proﬁ t business and our relatively 
new cyber product have seen attractive levels of growth, 
demonstrating our ability to both manage an established 
business and develop innovative products. Our cyber 
rollout has beneﬁ ted from the work of the Travelers 
Institut e®, our public policy think tank, which has held 
more than 20 Cyber: Prepare, Prevent, Mitigate, RestoreSM 
symposia across the country in conjunction with Federal 
Reserve regional banks and the U.S. Department of 
Homeland Security. In our Surety business, we continued 
to produce an industry-leading combined ratio and 
generated modest growth in net written premiums. 
The ﬁ nancial performance of our Management Liability 
and Surety businesses, both highly credit sensitive, has 
been remarkable, including through very challenging 
economic environments. 

In Personal Insurance, the segment generated a strong 
combined ratio of 95.1%, while both Homeowners and 
Auto delivered accelerating growth in policies in force and 
net written premiums throughout the year. 

In Personal Auto, proﬁ tability was aﬀ ected by an increase 
in bodily injury losses, which we believe is principally 
environmental as opposed to speciﬁ c to us or our Quantum 
Auto 2.0® product. Loss trends change in our business, and 
when that happens, our goal is to leverage our data and 
analytics to react as quickly as possible. In this regard, I note 
that our revised loss estimates related to recent quarters, 
not recent years. In response, we are taking the appropriate 
actions to improve our Personal Auto proﬁ tability. As we 
improve performance relative to our target returns, to 
the extent we are successful in retaining the high volume 
of new business that we added during the year, it will 
contribute to future proﬁ tability. 

Our agency Homeowners business once again produced 
superior ﬁ nancial results, with an outstanding 2016 
combined ratio of 83.9%. Homeowners net written 
premiums in 2016 grew for the ﬁ rst time since 2011, 
beneﬁ ting meaningfully from the growth in Auto. 

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Going forward, our leading position in Personal Insurance 
in the agency channel, along with our ability to oﬀ er  a 
whole-account solution — both auto and home — gives 
us an important competitive advantage. About half of our 
personal lines premium comes from accounts for which we 
write both the auto and home products. Our retention is 
higher on those accounts, contributing to higher lifetime 
account value. Also, the attractive returns we achieve 
on the homeowners business allow us to write the auto 
product at a somewhat higher combined ratio and still 
achieve our target returns for the segment. We believe 
that, over time, our ability to oﬀ er both the auto and home 
products will become increasingly important as technology 
evolves and the driving experience becomes increasingly 
autonomous. As that happens, we believe that for the 
industry, the homeowners product will come to represent 
a larger part of the personal insurance transaction. 

As in prior years, our 2016 results beneﬁ ted from 
reliable net investment income of $2.302 billion pre-tax 
($1.846 billion after-tax). We continue to experience 
declines in ﬁ xed income returns in line with our 
expectations due to reinvestment rates that remain 
at historically low levels. In our alternative investment 
portfolio, our hedge fund and private equity fund 
investments produced slightly higher returns in 2016 as 
compared to 2015, largely due to a rise in oil and gas prices 
and an increase in M&A activity. We emphasize risk-adjusted 
returns and credit quality, rather than reaching for returns 
that are not consistent with the underlying risk.

Total shareholder return  over time
Ultimately, the successful execution o f our strategy one 
year at a time — with all its component parts — drives our 
superior total returns to shareholders over time.

TOTAL SHAREHOLDER RETURN1

Travelers

Dow 30

S&P 500

S&P Financials

250%

200%

150%

100%

50%

0%

-50%

-100%

Jan. 1,
2007

Dec. 31,
2007

Dec. 31,
2008

Dec. 31,
2009

Dec. 31,
2010

Dec. 31,
2011

Dec. 31,
2012

Dec. 31,
2013

Dec. 31,
2014

Dec. 31,
2015

Dec. 31,
2016

1  Represents the change in stock price plus the cumulative amount of dividends, assuming dividend 

reinvestment. For each year on the chart, total return is calculated with January 1, 2007, as the starting 
point and December 31 of the relevant year as the ending point. Sources: SNL Financial and Bloomberg.

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Financial highlights

AT AND FOR THE YEAR ENDED DECEMBER 31. 
DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS.

 EARNED PREMIUMS 

TOTAL REVENUES 

OPERATING INCOME 

NET INCOME 

2016 

2015 

2014 

2013 

2012

$  24,534 

$  23,874 

$  23,713 

$  22,637 

$  22,357

$  27,625 

$  26,815 

$  27,174 

$  26,206 

$  25,756

$  2,967 

$  3,437 

$  3,641 

$  3,567 

$  2,441

$  3,014 

$  3,439 

$  3,692 

$  3,673 

$  2,473

NET INCOME PER DILUTED SHARE 

$  10.28 

$  10.88 

$  10.70 

$ 

9.74 

$ 

6.30

TOTAL INVESTMENTS 

$  70,488 

$  70,470 

$  73,261 

$  73,160 

$  73,838

TOTAL ASSETS 

$ 100,245 

$ 100,184 

$ 103,078 

$ 103,812 

$ 104,938

SHAREHOLDERS’ EQUITY 

$  23,221 

$  23,598 

$  24,836 

$  24,796 

$  25,405

RETURN ON EQUITY 

  12.5% 

  14.2% 

  14.6% 

  14.6% 

9.8%

OPERATING RETURN ON EQUITY 

  13.3% 

  15.2% 

  15.5% 

  15.5% 

  11.0%

BOOK VALUE PER SHARE 

$  83.05 

$  79.75 

$  77.08 

$  70.15 

$  67.31

DIVIDENDS PER SHARE 

$ 

2.62 

$ 

2.38 

$ 

2.15 

$ 

1.96 

$ 

1.79

The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property and casualty insurance for auto, home 
and business. The company’s diverse business lines oﬀ er its customers a wide range of coverage sold primarily 
through independent agents and brokers. A component of the Dow Jones Industrial Average, Travelers has approximately 
30,000 employees and operations in the United States and selected international markets.

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In contrast to a number of other property and casualty 
companies, our shareholder returns over recent 
years reﬂ ect consistent strong performance rather 
than a recovery from a signiﬁ cant decline during the 
ﬁ nancial crisis.

We couldn’t be more conﬁ dent that maintaining the 
approach we have followed for more than a decade is the 
right strategy to continue to build on Travelers’ outstanding 
record. It’s part of our DNA, we understand it, we’ve been 
executing it and it has been remarkably successful.

Well positioned at a time of change 
Going into 2017, we are especially mindful of the 
shifting political and economic landscape. While no 
one can be certain how actual events will unfold, we 
are conﬁ dent that we are well positioned to continue 
to succeed and deliver industry-leading returns in this 
changing environment. 

The new administration is on the record as advocating for  
growth-oriented policies, including greater infrastructure 
spending, tax reform and a more business-friendly 
regulatory environment. Given the businesses we are in, the 
products we sell and our geographic footprint, we believe 
we are in a strong posit ion to beneﬁ t from the additional 
insured exposures that would result from economic 
growth. Just as two examples, a growing economy 
would result in increased demand for both the workers 
compensation and surety products, two lines in which we 
have a leading position in the United States. In addition, 
after nearly a decade of historically low interest rates, a 
rise in interest rates as a result of increased economic 
activity would beneﬁ t our predominantly ﬁ xed income 
investment portfolio. 

As I mentioned in last year’s letter, one of the areas in which 
we have been and will continue to be vocal is regarding 
threats to the competitiveness of our domestic insurance 
industry. Speciﬁ cally, we continue to see the U.S. corporate 
tax rate — the highest of any industrialized nation — as 
encouraging insurers to shift capital oﬀ shore, ultimately 
harming the U.S. economy. As a primarily domestic U.S. 

insurer, we believe strongly that the guiding principle for 
any tax reform should be leveling the playing ﬁ eld for U.S. 
companies. We believe that a level playing ﬁ eld will be good 
for the economy and will create jobs. 

“ We believe we are 
in a strong position 
to beneﬁ t from the 
additional insured 
exposures that 
would result from 
economic growth.”

Since the 2016 election, I have been asked a number 
of times about the impact of potentially lower tax rates 
and higher net investment income on the insurance 
marketplace. The question is often framed this way: 
“Will insurers ‘give back’ the beneﬁ ts in the form of lower 
pricing?” At least as it relates to Travelers , the question 
incorrectly assumes that we price with a volume objective. 
We don’t. We price based on a return objective, and 
we establish our return thresholds relative to our cost 
of capital. I would observe that one impact of a lower 
tax rate is that our after-tax cost of debt, and therefore 
our cost of capital, will increase. Also, if an increase in 
economic activity leads to an increase in the risk-free 
rate, our cost of equity, and again our cost of capital, 
will increase. The increase in the cost of capital will need 
to be met by an increased return. The extent to which 
pricing will need to adjust — up or down — to produce 

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that return will depend on the extent to which we 
achieve that increased return through higher proﬁ ts as 
a result of a lower tax rate and/or higher net investment 
income. Of course, the competitive marketplace will also 
impact pricing. 

“ We seek to be an 
undeniable choice 
for our customers 
and an indispensable 
partner for our 
agents and brokers.”

Building for the future
Our strong performance over time has positioned us well 
for continued success. Our goal is to leverage this success 
to capture the opportunities that changes in our industry 
and in the wide r world inevitably will present; for example, 
as a result of advancing technologies, shifting demographics 
and changes in the landscape of distribution . 

We’re not only committed to delivering industry-leading 
results today, we’re committed to sustaining our 
ability to do so for the next decade. We’re making 
smart investments in areas such as talent, data and 
analytics, products and technology. We’re leveraging 
new technology and redesigning the way we develop, 
manufacture and sell our products and services to 
improve our productivity and eﬃ  ciency. And we’re 
anticipating how tomorrow’s customers and our agent 

and broker partners will access and interact with our 
products and services. We seek to be an undeniable 
choice for our customers and an indispensable partner for 
our agents and brokers. 

I’ve said many times that we view our ability to execute 
strategic transactions as a core competency and that the 
test for any potential transaction is that it contribute to our 
mission by improving our long-term return proﬁ le, reducing 
the volatility of our results and/or creating shareholder 
value through some other important strategic beneﬁ t. 
We recently announced that we agreed to acquire Simply 
Business, a transaction that passes this test. 

Simply Business, a leading provider of small business 
insurance policies in the United Kingdom, is a proﬁ table 
and growing technology company with impressive 
strategic capabilities, leading digital commerce talent 
and proven small business insurance expertise. Simply 
Business oﬀ ers products online on behalf of a broad 
panel of carriers. Operating since 2005, it has more than 
425,000 microbusiness customers, covering more than 
1,000 classes of business. Through its managing general 
agency, Simply Business participates as a panel member and 
underwrites a meaningful amount of the total premium it 
places through its platform each year. This demonstrates 
the value of its product and underwriting capabilities, as 
well as its customer analytics. Over time, we expect that 
Simply Business will provide us with eﬃ  cient access to 
serve the substantial microbusiness market in the United 
States and potentially other geographies.

More broadly, with technology and innovation driving 
customer preferences and expectations, advancing 
our digital agenda to best serve our customers and the 
marketplace is a key strategic priority. What r eally excites 
us is that Simply Business will help us accelerate that 
agenda. Also, as an important part of that agenda, we look 
forward to working with our agent and broker partne rs as 
we seek to deploy Simply Business’ capabilities to make the 
small commercial insurance transaction easier, faster and 
more eﬃ  cient.

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The Simply Business transaction also illustrates an important 
aspect of our international franchise. While our primarily 
U.S. footprint is very attractive given the prospects for 
the U.S. economy, particularly relative to the economic 
instability and geopolitical risk in so many regions around 
the world, having operations outside the country provides 
us with strategic value. It provides us with a platform 
from which we can identify new business opportunities, 
recruit world-class talent and acquire or develop strategic 
capabilities. Our proposed acquisition of Simply Business is 
a perfect example of all three.

Building for the future also requires that we maintain 
our talent advantage, and in that regard, diversity and 
inclusion is a business imperative. Our eﬀ orts are aimed 
at attracting and retaining the best talent from the 
broadest possible pool of talent. Diverse experiences and 
viewpoints yield greater insights and better outcomes, 
raising the bar on individual and team performance, 
sparking further innovation and sharpening our customer 
focus. We’re proud that in 2016, we were named as 
one of DiversityInc’s 25 Noteworthy Companies, a Best 
Place to Work for LGBT Equality by the Human Rights 
Campaign Foundation, a Top 100 Military Friendly® 
Employer by Victory Media, publisher of G.I. Jobs®, and 
to the Best for Vets list by Military Times. Today’s diverse 
and inclusive workforce will be an important factor in 
tomorrow’s success.

Giving back
In addition to focusing on the sustainability and proﬁ tability 
of our business, we’re also focused more broadly on the 
sustainability and prosperity of the communities we call 
home. Through corporate funding and the Travelers 
Foundation, we support academic and career success, 
develop thriving neighborhoods and enhance lives through 
arts and culture. Travelers has contributed more than 
$200 million to these causes over the last decade. 

I’m proud that our company and our employees are giving 
at greater rates than ever before. Last year’s employee 
giving campaign generated more than $5 million for 

important causes. On top of that, Travelers’ employees 
logged nearly 118,000 volunteer hours last year, up 30% 
from the previous year and 63% from two years ago. More 
important than the time spent volunteering, of course, 
is the impact of those eﬀ orts. As just one example of 
that, Travelers employees participated in the building of 
55 Habitat for Humanity homes during 2016. 

“ Diverse experiences 
and viewpoints yield 
greater insights and 
better outcomes, 
raising the bar on 
individual and team 
performance, sparking 
further innovation 
and sharpening our 
customer focus.”

We are particularly excited about one of our new 
initiatives: building community-designed playgrounds with 
KaBOOM!, a nonproﬁ t that brings neighbors together 
to build beautiful, environmentally friendly playgrounds 
in underserved communities. During 2017, we will 
sponsor the construction of six playgrounds across the 
United States. Each playground will be built with the 

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help of 125 Travelers employees and agents alongside 
75 community members. We’re passionate about this 
initiative because we believe that investing in children 
is important and that play matters. It allows children 
to create, explore, solve and imagine, promoting brain 
development, creative thinking and problem solving. 
Unfortunately, too many kids don’t have the beneﬁ t of 
safe, open spaces.

A team eﬀ ort
Our employees’ spirit of giving is just one example of 
what makes our workforce extraordinary. No other 
company can match our culture of heart and passion. 
We owe the strength of our position to the collective 
eﬀ orts of more than 30,000 people who execute in the 
marketplace every day.

I’m grateful to every person who helped us deliver this 
past year’s results: each of our employees, our agent and 
broker partners, the customers we are privileged to serve 
and our Board of Directors, who have provided essential 
guidance and counsel.

This is our team: talented, dedicated and motivated. 
Unburdened by distraction, we will continue to invest in 
our competitive strengths, press the formidable advantages 
that we have and develop new areas of distinction in pursuit 
of a new era of success.

ALAN D. SCHNITZER

Chief Executive Oﬃ  cer

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Management

Alan D. Schnitzer*+
Chief Executive Oﬃ  cer

Scott C. Belden+
Senior Vice President,
Reinsurance

D. Keith Bell
Senior Vice President,
Accounting Standards

Jay S. Benet*+
Vice Chairman and
Chief Financial Oﬃ  cer

Diane D. Bengston*+
Executive Vice President,
Enterprise Human Resources

Andy F. Bessette*+
Executive Vice President and
Chief Administrative Oﬃ  cer

Robert C. Brody*+
Executive Vice President,
Claim Services and
Special Liability Group

Lisa M. Caputo*+
Executive Vice President,
Marketing, Communications
and Customer Experience

James W. Chapman+
Senior Vice President,
National Property Practice Leader

John P. Cliﬀ  ord Jr.*+
Executive Vice President and
Chief Human Resources Oﬃ  cer

Renee H. Davis+
Vice President and
Chief Corporate Actuary

Behram M. Dinshaw*+
Executive Vice President and
President, Small Commercial

Marlyss J. Gage*+
Executive Vice President and
Enterprise Chief
Underwriting Oﬃ  cer

Myles P. Gibbons+
Senior Vice President and
President, Middle Market
Specialty Practices

Bruce R. Giﬀ  ord+
Senior Vice President and 
Actuary, Bond & Specialty 
Insurance, and Enterprise
Business Intelligence & 
Analytics Business Lead

Martin J. Henry+
Senior Vice President,
Risk Control

William H. Heyman*+
Vice Chairman and
Chief Investment Oﬃ  cer

Scott F. Higgins*+
Executive Vice President and
President, Middle Market

Bruce R. Jones*+
Executive Vice President, 
Enterprise Risk Management 
and Chief Risk Oﬃ  cer

Christine K. Kalla+
Senior Vice President,
Chief Ethics and
Compliance Oﬃ  cer and
Group General Counsel

Patrick F. Keegan Jr.+
Senior Vice President,
Construction & Energy and
President, Construction

Avrohom J. Kess*+
Vice Chairman and
Chief Legal Oﬃ  cer

Patrick J. Kinney*+
Executive Vice President,
Field Management

Michael F. Klein*+
Executive Vice President and
President, Personal Insurance,
and Head of Enterprise
Business Intelligence & Analytics

Jeﬀ  rey P. Klenk*+
Executive Vice President,
Management Liability, 
Bond & Specialty Insurance

Thomas M. Kunkel*+
Executive Vice President 
and President, 
Bond & Specialty Insurance

Madelyn J. Lankton*+
Executive Vice President and
Chief Information Oﬃ  cer,
Enterprise Operations
and eBusiness

Patrick L. Linehan+
Vice President,
Corporate Communications

Brian W. MacLean*+
President and
Chief Operating Oﬃ  cer

William C. Malugen Jr.*+
Executive Vice President and
President, National Accounts
and Property

Gabriella Nawi+
Senior Vice President,
Investor Relations

Eric Nordquist+
Senior Vice President,
Product Management,
Personal Insurance

Maria Olivo*+
Executive Vice President,
Strategic Development and
Corporate Treasurer

Brian P. Reilly
Senior Vice President and
Chief Auditor

Ellen M. Rizzo+
Senior Vice President, Claim
Shared Services and Chief
Financial Oﬃ  cer, Claim Services

Timothy D. Rogers+
Senior Vice President 
and Chief Financial 
Oﬃ  cer, Business and 
International Insurance

David D. Rowland+
Executive Vice President,
Fixed Income Investments

Douglas K. Russell+
Senior Vice President,
Corporate Controller

Scott W. Rynda
Senior Vice President,
Corporate Tax

Richard D. Schug+
Senior Vice President and
Actuary, Business and
International Insurance

Peter Schwartz
Senior Vice President and
Group General Counsel,
Corporate Litigation

Nicholas Seminara*+ 
Senior Vice President and
Group General Counsel, Claim,
Subrogation and Travelers
Investigative Services

Wendy C. Skjerven
Vice President,
Corporate Secretary and 
Group General Counsel

Kevin C. Smith*+
Executive Vice President and
President, International

Kenneth F. Spence III*+
Executive Vice President and
General Counsel

Gregory C. Toczydlowski*+
Executive Vice President and
President, Business Insurance

Glenn E. Westrick
Senior Vice President,
Government Relations

Joan K. Woodward*+
Executive Vice President,
Public Policy and President,
The Travelers Institute

Daniel T. H. Yin+
Executive Vice President,
Alternative Investments

* Management Committee Member
+  Operating Committee Member

11

 
T R AV E L E R S       |      2 0 16 A N N U A L  R E P O R T

From left: Duberstein, Shepard, Higgins, Dasburg, Kane, Hodgson, Schnitzer

Board of Directors

Alan L. Beller
Senior Counsel, 
Cleary Gottlieb Steen 
& Hamilton LLP
Director since 2007

John H. Dasburg*
Chairman and CEO, 
ASTAR USA, LLC
Director since 1994

Janet M. Dolan
President, Act 3 Enterprises, LLC
Retired President and 
CEO, Tennant Company
Director since 2001

Kenneth M. Duberstein
Chairman and CEO, 
The Duberstein Group, Inc.
Director since 1998

12

Patricia L. Higgins
Retired President and CEO, 
Switch and Data Facilities, Inc.
Director since 2007

Thomas R. Hodgson
Retired President and COO, 
Abbott Laboratories
Director since 1997

William J. Kane
Retired Audit Partner, 
Ernst & Young
Director since 2012

Cleve L. Killingsworth Jr.
Retired President and CEO, 
Blue Cross Blue Shield of 
Massachusetts, Inc.
Director since 2007

Philip T. Ruegger III
Retired Chairman, Simpson 
Thacher & Bartlett LLP
Director since 2014

Todd C. Schermerhorn
Retired Senior Vice President 
and CFO, C.R. Bard, Inc.
Director since 2016

Alan D. Schnitzer
CEO, Travelers
Director since 2015

Donald J. Shepard
Retired Chairman of the Executive 
Board and CEO, AEGON N.V.
Director since 2009

Laurie J. Thomsen
Retired Partner and Co-Founder, 
Prism Venture Partners
Director since 2004

* Independent Chairman

T R AV E L E R S       |      2 0 16 A N N U A L  R E P O R T

From left: Killingsworth, Thomsen, Beller, Ruegger, Schermerhorn, Dolan

Board Committees

Audit
Dasburg (Chair)
Beller
Dolan
Higgins
Hodgson
Kane
Ruegger
Schermerhorn

Compensation
Shepard (Chair)
Duberstein
Killingsworth
Thomsen

Executive
Dasburg (Chair)
Duberstein
Hodgson
Schnitzer
Shepard
Thomsen

Investment and
Capital Markets
Thomsen (Chair)
Duberstein
Killingsworth
Shepard

Nominating
and Governance
Duberstein (Chair)
Killingsworth
Shepard
Thomsen

Risk
Hodgson (Chair)
Beller
Dasburg
Dolan
Higgins
Kane
Ruegger
Schermerhorn

13

  T R AV E L E R S       |      2 0 16 A N N U A L R E P O R T

 
UNITED STATES SECURITIES AND  EXCHANGE  COMMISSION
Washington, D.C. 20549

(cid:2) ANNUAL  REPORT PURSUANT TO SECTION 13  OR  15(d)  OF  THE

SECURITIES  EXCHANGE ACT OF 1934

FORM  10-K

For the fiscal year ended December 31,  2016

or

(cid:3) TRANSITION REPORT  PURSUANT  TO  SECTION  13 OR  15(d) OF  THE

SECURITIES  EXCHANGE ACT OF 1934
For the transition period from 

  to

Commission file number 001-10898

The Travelers  Companies, Inc.

(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of
incorporation or organization)

41-0518860
(I.R.S. Employer
Identification No.)

485 Lexington Avenue,
New York, NY 10017
(Address of principal executive  offices)  (Zip Code)

(917) 778-6000
(Registrant’s telephone number, including area  code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of  each  exchange on  which registered

Common stock, without par value

New  York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: 

 None

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities
Act). Yes  (cid:2) No (cid:3)

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:3) No (cid:2)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during  the preceding  12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  (cid:2) No (cid:3)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and  posted  pursuant to Rule 405 of Regulation S-T (§232.405 of  this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes  (cid:2) No  (cid:3)

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting
company’’ in Rule 12b-2 of the Act (Check one):
Large accelerated  filer (cid:2)
Non-accelerated filer (cid:3)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  (cid:3) No  (cid:2)

Accelerated filer (cid:3)
Smaller reporting company (cid:3)

As of June 30, 2016, the aggregate market value of the registrant’s voting and non-voting common equity held by
non-affiliates was $34,172,576,191.

As of February 10, 2017, 279,685,489 shares of the registrant’s common stock (without par value) were outstanding.

Portions of the Registrant’s Proxy Statement relating  to the  2017 Annual Meeting of Shareholders are  incorporated  by
reference into Part III of this report.

DOCUMENTS INCORPORATED BY REFERENCE

The Travelers Companies, Inc.

Annual Report on Form 10-K

For  Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS

Item Number

1.
1A.
1B.
2.
3.
4.

5.

6.
7.

7A.
8.
9.

9A.
9B.

10.
11.
12.

13.
14.

15.
16.

Part  I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk  Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved  Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal  Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine  Safety  Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part  II
Market  for Registrant’s  Common Equity, Related Shareholder Matters  and Issuer

Purchases  of  Equity  Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected  Financial  Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s  Discussion  and  Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and  Qualitative  Disclosures About Market  Risk . . . . . . . . . . . . . . . . .
Financial Statements  and  Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes  in  and  Disagreements with  Accountants  on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and  Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part  III
Directors, Executive  Officers and Corporate  Governance . . . . . . . . . . . . . . . . . . . .
Executive  Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security  Ownership  of  Certain Beneficial Owners and Management and Related

Shareholder  Matters

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and  Related Transactions, and Director Independence . . . . . .
Principal  Accountant  Fees  and  Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part  IV
Exhibits  and  Financial  Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index  to Consolidated  Financial Statements  and Schedules . . . . . . . . . . . . . . . . . .
Exhibit  Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

3
44
69
69
69
69

69
73

74
148
151

264
264
267

268
270

270
272
272

272
272
273
275
285

2

PART  I

Item 1. BUSINESS

The Travelers Companies, Inc.  (together with its consolidated  subsidiaries,  the  Company) is  a
holding  company principally  engaged,  through  its  subsidiaries,  in providing  a wide  range of commercial
and  personal  property and  casualty  insurance products and  services  to businesses, government  units,
associations and  individuals. The Company is incorporated  as a  general  business  corporation  under the
laws of the state of  Minnesota  and is  one of the oldest  insurance organizations  in the  United  States,
dating back  to 1853.  The  principal executive offices  of  the Company are located at  485 Lexington
Avenue, New  York,  New York 10017,  and its telephone number is (917)  778-6000.  The  Company also
maintains executive offices  in Hartford,  Connecticut,  and St.  Paul, Minnesota.  The  term  ‘‘TRV’’  in this
document refers  to  The Travelers Companies,  Inc.,  the parent  holding  company  excluding subsidiaries.

For  a  summary  of  the Company’s  revenues,  operating  income  and  total  assets by  reportable

business  segments, see note 2 of  notes  to the consolidated  financial  statements.

PROPERTY  AND CASUALTY  INSURANCE  OPERATIONS

The property and casualty insurance  industry  is  highly  competitive in  the  areas of  price,  service,
product  offerings, agent relationships  and methods of distribution.  Distribution  methods  include the  use
of  independent agents, exclusive  agents,  direct marketing  and/or salaried employees. According  to
A.M.  Best, there  are  approximately  1,200 property  and  casualty groups in  the United States, comprising
approximately  2,650  property  and casualty companies. Of those  groups,  the top  150 accounted for
approximately  92% of the  consolidated  industry’s total net  written  premiums in  2015. The  Company
competes with both  foreign  and domestic insurers. In  addition,  several property  and casualty  insurers
writing  commercial  lines  of  business,  including the  Company,  offer products  for  alternative  forms  of
risk  protection  in addition to  traditional  insurance  products.  These products  include large  deductible
programs  and  various forms of  self-insurance, some  of  which  utilize captive insurance  companies  and
risk  retention  groups. The Company’s  competitive  position in  the  marketplace is  based  on many  factors,
including the  following:

• ability to  profitably  price  business, retain  existing customers and  obtain  new  business;

• premiums  charged, contract  terms and conditions, products  and  services  offered (including the

ability  to  design customized  programs);

• agent,  broker  and  policyholder  relationships;

• ability to  keep  pace  relative to  competitors with  changes in technology  and  information systems;

• speed  of claims  payment;

• ability to  provide  products  and  services in  a cost  effective  manner;

• ability to  adapt to changes  in business models, technology,  customer  preferences or  regulation

impacting the  markets in which the  Company operates;

• perceived  overall  financial strength and corresponding ratings  assigned by independent rating

agencies;

• reputation, experience  and qualifications of employees;

• geographic scope  of  business;  and

• local presence.

In  addition, the  marketplace is affected  by the available capacity of the  insurance  industry,  as
measured  by statutory capital and  surplus,  and the availability  of  reinsurance from  both  traditional

3

sources,  such  as reinsurance  companies  and  capital markets  (through catastrophe bonds), and
non-traditional sources,  such  as  hedge  funds and  pension  plans. Industry  capacity as measured by
statutory  capital  and  surplus expands  and contracts  primarily in conjunction with profit  levels  generated
by  the industry, less  amounts  returned  to  shareholders  through dividends and share repurchases.
Capital raised  by  debt  and  equity  offerings may  also increase statutory capital and  surplus.

Pricing  and Underwriting

Pricing of the  Company’s  property  and casualty  insurance products is generally developed  based
upon  an estimation  of expected  losses,  the expenses associated with  producing, issuing and  servicing
business  and  managing claims, the  time  value of money related  to the expected loss and expense cash
flows,  and  a  reasonable  allowance for  profit that considers the capital needed  to support the Company’s
business.  The  Company has  a disciplined approach  to underwriting and risk  management that
emphasizes product returns and  profitable growth  over  the long-term rather than premium volume  or
market share.  The  Company’s insurance  subsidiaries  are subject to state laws and regulations regarding
rate and  policy  form  approvals.  The applicable  state laws  and regulations  establish standards in certain
lines of business  to  ensure  that  rates  are  not excessive, inadequate, unfairly discriminatory,  or used to
engage in unfair  price competition.  The  Company’s  ability to increase rates and the relative timing of
the  process  are  dependent upon  each  respective state’s  requirements,  as well as the competitive market
environment.

Geographic  Distribution

The following  table  shows  the geographic  distribution of the Company’s consolidated direct written

premiums for  the year ended  December  31,  2016:

Location

Domestic:

New  York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New  Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  domestic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

10.0%
9.8
7.4
4.6
4.1
4.0
3.9
3.3
3.1
43.6

Total  domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

93.8

International:

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other international(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total international . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.3
1.9

6.2

Consolidated  total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No  other single state or country accounted for  3.0% or more of the Company’s

consolidated direct  written  premiums  written  in 2016.

4

Catastrophe  Exposure

The wide geographic distribution of  the Company’s  property and  casualty insurance operations

exposes it to claims  arising out of  catastrophes. The  Company uses various analyses  and methods,
including proprietary  and  third-party  computer modeling  processes, to continually monitor and  analyze
underwriting  risks of  business in natural  catastrophe-prone areas  and  target risk areas for conventional
terrorist  attacks (defined  as  attacks  other  than nuclear,  biological, chemical or  radiological events). The
Company  relies,  in  part,  upon  these  analyses to make underwriting decisions designed to manage its
exposure on catastrophe-exposed  business. For example, as a result of these analyses, the Company  has
at various times limited the  writing of  new  property and homeowners business in some markets and  has
selectively  taken  underwriting  actions  on  new  and existing business. These underwriting  actions on  new
and  existing  business include  tightening  underwriting standards, selective price increases and changes to
deductibles specific  to hurricane-,  tornado-, wind- and hail-prone  areas. See ‘‘Item 7—Management’s
Discussion  and  Analysis  of  Financial  Condition and Results of Operations—Catastrophe Modeling’’  and
‘‘—Changing  Climate Conditions.’’  The  Company also  utilizes reinsurance to manage its aggregate
exposures to catastrophes. See ‘‘—Reinsurance.’’

Segment  Information

The Company is organized into  three reportable business segments: Business  and International

Insurance; Bond & Specialty  Insurance;  and Personal  Insurance.

BUSINESS AND  INTERNATIONAL  INSURANCE

Business and  International Insurance offers a broad array of property  and casualty insurance  and
insurance related services  to  its  clients,  primarily in the United States and in  Canada, as well as  in the
United Kingdom,  the Republic  of Ireland, Brazil and throughout  other parts  of the world as a
corporate member  of  Lloyd’s. Business  and International Insurance is organized as follows:

Domestic

• Select  Accounts  provides small  businesses  with property  and  casualty products, including

commercial multi-peril, commercial property, general  liability, commercial  auto  and  workers’
compensation  insurance.

• Middle  Market  provides  mid-sized  businesses with property and  casualty products, including

commercial  multi-peril, commercial property, general liability, commercial  auto  and workers’
compensation  insurance, as well  as risk  management, claims  handling and other services. Middle
Market  generally  provides  these  products to mid-sized businesses through Commercial Accounts,
as well  as  to  targeted industries  through Construction, Technology, Public Sector Services and
Oil &  Gas.  Middle  Market  also provides mono-line umbrella  and excess  coverage insurance
through  Excess  Casualty.

• National  Accounts  provides large  companies with casualty products and  services, including

workers’ compensation, general  liability  and automobile  liability, generally utilizing loss-sensitive
products, on both a  bundled  and unbundled basis. National  Accounts also includes the
Company’s  commercial  residual market business, which primarily offers workers’  compensation
products  and  services to the  involuntary market.

• First  Party provides traditional  and customized property insurance programs  to large  and

mid-sized  customers  through  National Property, insurance for goods in transit and movable
objects,  as  well as builders’  risk insurance,  through Inland Marine, insurance for the marine
transportation  industry  and related services, as well  as other  businesses involved in  international

5

trade,  through  Ocean  Marine,  and comprehensive breakdown coverages for  equipment,  including
property and  business  interruption  coverages, through Boiler & Machinery.

• Specialized  Distribution provides  insurance coverage for the commercial transportation industry,
as well  as  commercial  liability and commercial property  policies for  small,  difficult to  place
specialty  classes  of  commercial business primarily  on an excess and  surplus lines basis, through
Northland,  and tailored property  and casualty programs  on  an  admitted basis for customers with
common  risk  characteristics  or  coverage requirements through National Programs. Specialized
Distribution  also serves  small  to  medium-sized  agricultural businesses, including farms, ranches,
wineries  and  related operations, through Agribusiness.

International

• International,  through its  operations in Canada, the United  Kingdom  and the Republic of

Ireland, offers property  and casualty insurance and risk  management services to  several customer
groups,  including, among others,  those in  the technology, public services, and financial and
professional services  industry sectors.  In addition, International markets personal lines and  small
commercial  insurance  business in Canada. International also provides insurance coverages for
foreign  organizations with  exposures in the  United States through Global Partner Services.
International,  through  its  Lloyd’s syndicate  (Syndicate  5000), for which the Company  provides
100%  of the  capital, underwrites five principal businesses—marine,  global property, accident &
special  risks,  power & utilities  and aviation.

International  also  includes  results from  J.  Malucelli Participa¸c˜oes em Seguros e Resseguros S.A.
(JMalucelli)  and J.  Malucelli  Latam S.A.  in Brazil.  The Company owns 49.5% of both
JMalucelli, a  market  leader  in surety coverages in Brazil, and  J. Malucelli Latam S.A., which  in
September  2015  acquired a  majority interest in  JMalucelli Travelers Seguros S.A., a Colombian
start-up  surety  provider.  These joint venture investments are accounted for using the  equity
method  and  are  included in  ‘‘other  investments’’ on the consolidated balance sheet. Also, as a
result of  a transaction  that  was  completed in October 2015  with Paran´a Banco S.A., the
Company’s joint  venture  partner  in Brazil, the Company acquired 100% of the common stock of
Travelers  Participa¸c˜oes  em  Seguros Brasil S.A., which comprises JMalucelli’s former  property
and  casualty insurance  business  other than surety. The  Company consolidates this investment  in
its  financial  statements.

Business  and International 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  are  collectively  referred to as  Business and International Insurance Other.

Selected  Market  and  Product  Information

The following  table sets forth Business and International  Insurance’s net written premiums by
market and  product  line  for the  periods  indicated. For a description of  the markets and product lines
referred  to in the  table,  see ‘‘—Principal Markets and Methods of Distribution’’ and ‘‘—Product Lines,’’
respectively.

6

(for the year ended December 31, in  millions)

2016

2015

2014

% of Total
2016

By  market:

Domestic:

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle  Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National  Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized  Distribution . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,729
6,463
1,058
1,601
1,094

12,945
1,730

$ 2,716
6,302
1,048
1,564
1,111

12,741
1,842

$ 2,707
6,077
1,047
1,579
1,074

12,484
2,152

18.6%
44.0
7.2
10.9
7.5

88.2
11.8

Total  Business  and  International  Insurance by market .

$14,675

$14,583

$14,636

100.0%

By  product line:
Domestic:

Workers’  compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  automobile . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  property . . . . . . . . . . . . . . . . . . . . . . . . . . .
General  liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  multi-peril
. . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Business  and  International  Insurance by product
line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,945
2,037
1,787
1,987
3,157
32

12,945
1,730

$ 3,915
1,958
1,760
1,924
3,146
38

12,741
1,842

$ 3,792
1,891
1,783
1,872
3,104
42

12,484
2,152

26.9%
13.9
12.2
13.5
21.5
0.2

88.2
11.8

$14,675

$14,583

$14,636

100.0%

Principal Markets and Methods  of  Distribution

Business and  International Insurance markets  and distributes its products through approximately
11,000  independent  agencies  and  brokers.  Agencies and brokers are serviced by 121 field offices and
three  customer  service  centers.

Business and  International Insurance builds relationships with  well-established, independent
insurance agencies and  brokers.  In  selecting new independent agencies and brokers to  distribute its
products, Business  and International  Insurance  considers, among  other attributes,  each agency’s or
broker’s  financial strength,  staff  experience and strategic fit with the Company’s operating and
marketing plans.  Once  an agency or  broker  is  appointed, Business and International  Insurance carefully
monitors its performance.  The  majority  of products  offered  in the United States are distributed through
a  common base  of independent  agents  and brokers, many of whom also  sell the Company’s Personal
Insurance products. Additionally, several  operations may underwrite business with agents that specialize
in servicing the  needs  of certain  of  the industries served by these operations. Business and International
Insurance continues to make significant  investments  in enhanced  technology utilizing internet-based
applications to  provide  real-time interface  capabilities  with independent agencies and brokers.

• Select Accounts markets  and  distributes its products to small  businesses in  the United  States,
generally  with fewer than  50 employees,  through a large network  of  independent agents  and
brokers. Products  offered by Select Accounts are guaranteed-cost  policies,  including packaged
products  covering  property  and liability exposures. Each  small  business  risk  is independently
evaluated via an automated  underwriting platform which in  turn  enables  agents to  quote, bind
and  issue a  substantial  amount of new small business risks at their desktop in  an  efficient
manner  that significantly  reduces the  time  period between quoting a  price  on a  new policy  and

7

issuing that policy.  Risks with  more complex  characteristics  are  underwritten  with  the assistance
of  Company  personnel. Select  Accounts has established a  strong  marketing  relationship with its
distribution  network and  has provided this network with defined  underwriting  policies, a  broad
array of products  and  competitive prices. In  addition,  the Company has  established  centralized
service  centers  to help agents  perform many service functions,  in  return for a  fee.

• Middle  Market  markets  and  distributes its products  and services primarily  to mid-sized
businesses in  the United  States with 50 to 1,000  employees through  a large network  of
independent agents  and  brokers.  The Company offers  a  full line  of  products  to its  Middle
Market  customers  with an  emphasis on  guaranteed  cost  programs. Each account is  underwritten
based  on  the  unique  risk  characteristics, loss history and coverage  needs  of  the  account.  The
ability to  underwrite  at this  detailed level allows  Middle Market  to have  a broad  risk appetite
and  a diversified  customer  base.  Within Middle Market,  products and services  are tailored  to
certain  targeted  industry  segments of significant size and complexity that require  unique
underwriting, claim,  risk  management or other  insurance-related products  and  services.

• National  Accounts  markets  and  distributes its products and services  to  large companies in the

United  States  through a  network  of national and regional brokers, primarily utilizing
loss-sensitive products  in  connection with a large deductible or self-insured program and, to  a
lesser extent,  a retrospectively rated or  a guaranteed  cost insurance  policy.  National Accounts
also  provides  casualty products  and services through retail brokers on an unbundled  basis,  using
third-party administrators  for  insureds who utilize  programs such as collateralized  deductibles,
captive  reinsurers  and  self-insurance. National Accounts provides insurance-related  services,  such
as risk  management  services,  claims administration, loss control and risk management
information services,  either  in  addition to, or in lieu of, pure risk coverage, and generated
$253 million  of  fee  income  in  2016, excluding commercial residual market business. The
commercial  residual  market  business of National Accounts sells claims  and policy management
services  to  workers’  compensation pools throughout the United States, and generated
$133 million  of  fee  income  in  2016. National Accounts  services approximately 36%  of the total
workers’  compensation  assigned risk market, making  the Company one of the largest servicing
carriers  in  the  industry. Workers’  compensation accounted for approximately 72% of sales to
National  Accounts  customers  during 2016, based on direct written premiums and fees.

• First  Party  markets  and  distributes its products and services  to  a wide customer base in the

United  States  having  specialized  property  and casualty coverage requirements through a  large
network  of agents  and  brokers. First  Party provides  traditional and customized property
insurance  programs to large and  mid-sized  customers; insurance  for  goods in transit and
movable  objects; builders’  risk insurance; and insurance for the marine transportation industry,
providers  of related  services and other businesses involved  in international trade. In addition,
First Party provides comprehensive breakdown coverages for equipment, including property and
business  interruption  coverages.

• Specialized  Distribution  markets and distributes its products through brokers, wholesale agents,
program  managers  and  specialized retail agents who operate in certain markets in  the United
States  that are not  typically served by the Company’s  appointed retail agents, or  who maintain
certain  affinity  arrangements in  specialized market segments. The wholesale excess and surplus
lines  market, which is characterized by the absence of rate  and form regulation, allows for more
flexibility to  write certain classes of business.  In  working with agents or program managers  on  a
brokerage basis, Specialized  Distribution underwrites the business and sets the  premium level. In
working  with agents  or  program  managers with delegated  underwriting authority, the agents
produce  and underwrite  business  subject to underwriting guidelines that have been specifically
designed  for each facility  or  program.

8

• International  markets  and  distributes its products principally  through  brokers in  each of  the

countries  in which  it operates.  International also writes business at Lloyd’s, where its products
are distributed  through Lloyd’s  wholesale and retail brokers. By virtue  of Lloyd’s worldwide
licenses,  Business  and  International Insurance has access to international  markets across the
world.

Pricing  and Underwriting

Business and  International Insurance utilizes underwriting, claims, engineering, actuarial and

product  development disciplines  for  particular industries, in conjunction with  extensive  amounts of
proprietary  data  gathered and  analyzed  over  many  years, to facilitate  its risk  selection process and
develop pricing  parameters.  The Company  utilizes both standard industry forms and proprietary forms
for the  insurance policies  it issues.

A  portion of business in  this segment, particularly in  National Accounts and Construction, is
written  with  large  deductible  insurance  policies. Under  workers’ compensation insurance contracts with
deductible features, the  Company is obligated  to  pay  the claimant the full amount of the claim. The
Company  is subsequently  reimbursed  by  the  contractholder for the deductible amount  and is  subject to
credit  risk until  such  reimbursement  is  made. At December 31, 2016, contractholder payables on
unpaid losses  within  the  deductible layer of large deductible policies and the associated receivables
were  each  approximately  $4.61 billion.  Business  and International Insurance also utilizes retrospectively
rated policies  for  another portion  of  the business, primarily for workers’  compensation coverage.
Although the retrospectively  rated  feature of the  policy substantially reduces insurance  risk  for the
Company, it introduces additional credit risk to  the Company.  Premiums receivable from holders of
retrospectively  rated policies  totaled  approximately $70  million at December 31, 2016. Significant
collateral,  primarily letters  of  credit  and,  to  a lesser extent, cash collateral, trusts or surety bonds, is
generally  obtained  for large  deductible  plans and/or retrospectively rated  policies that provide for
deferred  collection  of deductible recoveries and/or ultimate  premiums. The  amount of  collateral
requested is  predicated  upon the creditworthiness of the customer  and the nature of the insured risks.
Business and  International Insurance  continually monitors the credit exposure on individual accounts
and  the  adequacy  of collateral.  For  additional information concerning credit  risk  in certain of the
Company’s businesses,  see  ‘‘Item  1A—Risk Factors—We are also exposed to credit risk in certain  of
our insurance  operations  and  with  respect  to certain  guarantee  or  indemnification arrangements that
we have  with  third  parties.’’

Product Lines

Business and  International Insurance writes the  following types of coverages:

Domestic

• Workers’ Compensation. Provides coverage for employers for specified  benefits payable under

state or  federal  law  for workplace  injuries  to employees.  There are typically  four types  of
benefits payable  under  workers’ compensation policies: medical  benefits, disability  benefits,  death
benefits and vocational  rehabilitation benefits.  The  Company  emphasizes  managed  care  cost
containment strategies,  which involve  employers,  employees and care providers  in  a cooperative
effort that  focuses  on the injured employee’s early return to work and  cost-effective  quality  care.
The Company  offers the  following types of workers’  compensation  products:

• guaranteed-cost insurance products,  in which  policy premium charges are fixed for  the

period of coverage  and do not vary as  a result  of  the insured’s loss  experience;

9

• loss-sensitive  insurance products, including large deductible and retrospectively rated

policies,  in  which  fees  or  premiums are adjusted based on  actual  loss experience of the
insured  during  the policy  period; and

• service  programs,  which are  generally  sold to the Company’s National Accounts customers,
where  the Company receives  fees rather than premiums  for providing loss  prevention, risk
management, and claim  and benefit administration services  to  organizations  under  service
agreements.

The Company  also  participates  in state  assigned risk  pools  as a  servicing carrier  and  pool
participant.

• Commercial  Automobile. Provides coverage for businesses against losses incurred from personal
bodily  injury, bodily injury  to third parties,  property  damage  to  an  insured’s vehicle  and property
damage  to other  vehicles and  other property resulting from the  ownership,  maintenance  or use
of  automobiles and trucks  in a business.

• Commercial  Property. Provides coverage for loss of or damage to buildings,  inventory and

equipment from  a  variety of  events, including, among others, hurricanes and other windstorms,
tornadoes,  earthquakes, hail, wildfires, severe winter weather, floods, volcanic  eruptions,
tsunamis, theft, vandalism, fires,  explosions, terrorism and financial loss  due  to business
interruption resulting  from  covered property damage.  For additional information on terrorism
coverages, see ‘‘Reinsurance—Catastrophe Reinsurance—Terrorism Risk Insurance Program.’’
Commercial property  also  includes specialized equipment insurance,  which provides coverage  for
loss or  damage  resulting from  the mechanical breakdown of boilers and  machinery, and ocean
and  inland  marine  insurance,  which provides coverage for goods in transit and unique,
one-of-a-kind  exposures.

• General  Liability. Provides coverages for businesses against third-party  claims arising from

accidents  occurring  on  their premises or arising  out  of their operations, including  as a result  of
injuries sustained  from  products  sold. Specialized liability policies may also include coverage for
directors’  and  officers’  liability  arising in  their official capacities, employment practices liability
insurance,  fiduciary  liability  for trustees and sponsors of pension, health  and welfare, and other
employee benefit plans,  errors  and omissions insurance  for employees,  agents, professionals  and
others arising from  acts  or failures to  act under specified  circumstances, as well as  umbrella and
excess  insurance.

• Commercial  Multi-Peril. Provides a combination of the  property and liability coverages

described in the  foregoing product line descriptions.

International

• Provides  coverage for  auto and motor (similar  to  automobile coverage in the United States),

personal property,  employers’ liability (similar to  workers’  compensation coverage  in the United
States),  public  and product  liability  (the  equivalent  of  general  liability),  professional  indemnity
(similar  to  professional  liability coverage),  commercial property, surety, marine,  aviation,
personal accident  and  kidnap & ransom.  Marine provides  coverage for  ship  hulls, cargoes
carried,  private  yachts,  marine-related liability, offshore energy,  ports  and terminals, fine  art and
terrorism. Aviation provides coverage  for worldwide aviation  risks  including  physical damage and
liabilities  for airline, aerospace, general aviation, aviation  war  and space  risks.  Personal  accident
provides financial  protection in the event  of  death or disablement  due to  accidental bodily
injury, while kidnap  &  ransom  provides financial protection  against  kidnap,  hijack, illegal
detention  and extortion. While the covered hazards may be similar  to those  in the  U.S. market,

10

the  different legal  environments can make the  product risks  and coverage  terms  potentially very
different  from  those  the Company faces in the United States.

Net Retention Policy  Per  Risk

The following  discussion  reflects  the  Company’s  retention policy  with respect to Business and
International  Insurance as  of January  1,  2017. For third-party liability, Business and International
Insurance generally  limits its net  retention, through  the use of reinsurance, to a maximum of
$16.0  million per  insured,  per occurrence.  For  property exposures, Business and International Insurance
generally  limits its  retained  amount  per  risk to $20.0  million per occurrence, net of reinsurance.
Business and  International Insurance  generally retains its workers’ compensation exposures.
Reinsurance  treaties  often have  aggregate limits or caps  which may result in larger net per-risk
retentions if  the  aggregate  limits  or  caps are reached. Business and International Insurance utilizes
facultative  reinsurance  to  provide additional limits capacity or to reduce retentions on an individual risk
basis. Business and International  Insurance may also  retain amounts greater than those described
herein  based  upon  the  individual characteristics of the risk.

Geographic  Distribution

The following  table  shows  the geographic  distribution of Business and International Insurance’s

direct  written premiums  for the year  ended December 31, 2016:

Location

Domestic:

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New  York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New  Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  domestic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

11.7%
8.6
6.1
4.4
3.7
3.6
3.3
3.3
45.1

Total  domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89.8

International:

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  international(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.2
3.0

Total  international . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.2

Total Business and International Insurance . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No  other single state or country accounted for  3.0% or more of Business and

International  Insurance’s direct written premiums in 2016.

Competition

The insurance industry is  represented in the commercial marketplace  by many  insurance
companies of  varying size as  well  as  other entities offering risk alternatives, such as self-insured
retentions or captive  programs.  Market  competition works within the insurance regulatory framework to
set  the  price  charged  for insurance  products and  the levels of coverage and  service provided. A
company’s  success in  the competitive  commercial insurance  landscape is largely measured  by its ability

11

to profitably  provide  insurance and  services, including claims handling and risk control, at  prices and
terms that  retain existing customers  and  attract new customers. See ‘‘Item 1A—Risk Factors—The
intense  competition  that we face,  and  the impact of innovation, technological change and  changing
customer preferences on the  insurance  industry and the markets  in which we operate, could harm  our
ability  to  maintain or  increase our  business  volumes and our  profitability.’’

Domestic

Competitors  typically write  Select Accounts  business  through independent agents  and, to a lesser

extent, regional brokers,  and  as  direct  writers. Both national and regional property and casualty
insurance companies  compete  in the  Select Accounts market which generally  comprises lower-hazard,
‘‘Main Street’’ business customers.  Risks  are  underwritten and priced  using standard  industry practices
and  a  combination  of  proprietary  and  standard industry  product offerings. Competition in this market is
primarily  based on  product offerings,  service levels, ease of  doing business and price.

Competitors  typically write  Middle  Market business through independent agents and  brokers.
Several  of  Middle  Market’s operations  require  unique  combinations of industry knowledge, customized
coverage,  specialized  risk  control and  loss handling services,  along  with partnerships with agents and
brokers that also focus  on  these markets. Competitors in  this market are primarily national property
and  casualty  insurance  companies  that  write most classes of business using traditional products and
pricing, and regional insurance  companies.  Companies compete based on product offerings, service
levels,  price and  claim  and  loss  prevention  services. Efficiency through automation and response time  to
agent,  broker and customer  needs  is  one key to  success in this market.

In  the National  Accounts  market,  competition is based  on price, product  offerings, claim and  loss

prevention services, managed  care cost  containment, risk management information  systems and
collateral  requirements.  National Accounts  primarily competes with  national property and casualty
insurance companies,  as  well  as  with  other underwriters  of  property and casualty insurance in the
alternative  risk  transfer  market, such  as  self-insurance plans, captives managed by others, and a variety
of  other risk-financing vehicles and  mechanisms. The residual market division competes for state
contracts to  provide  claims  and policy  management  services.

First Party and  Specialized Distribution  compete in focused target markets. Each of these markets
is different and  requires  unique combinations of industry knowledge, customized  coverage, specialized
risk  control and  loss handling services,  along with  partnerships  with agents and brokers that also  focus
on  these markets.  Some  of  these businesses  compete with national carriers  with similarly  dedicated
underwriting  and marketing  groups,  whereas  others compete with smaller regional companies. Each of
these businesses has regional structures  that allow them to deliver personalized service and  local
knowledge to  their customer  base.  Specialized agents and brokers, including wholesale agents and
program  managers,  supplement this  strategy.  In all of these businesses, the  competitive strategy
typically is the application  of focused  industry  knowledge to insurance and risk needs.

International

International  competes  with numerous international and  domestic insurers in Canada, the United

Kingdom, the  Republic  of Ireland and  Brazil.  Companies compete on the basis of price, product
offerings and the  level of claim and risk  management services provided. The Company has  developed
expertise in various  markets in  these countries similar to those served in  the United States and provides
both property and casualty coverage for these markets.

At Lloyd’s,  International  competes  with  other  syndicates operating in the Lloyd’s market as well as
international  and  domestic  insurers in the various markets where the Lloyd’s operation writes business
worldwide. Competition is again based  on price,  product and service. The Company focuses on lines it
believes  it can underwrite  effectively and profitably  with an emphasis on short-tail insurance lines.

12

BOND  & SPECIALTY INSURANCE

Bond &  Specialty  Insurance provides surety,  fidelity,  management liability, professional liability,
and  other  property  and casualty coverages  and related  risk management services to  a wide range of
primarily  domestic  customers, utilizing  various degrees of financially-based underwriting approaches.
The range of  coverages  includes performance, payment and commercial surety and fidelity bonds for
construction and general commercial  enterprises; management liability coverages including directors’
and  officers’  liability, employee  dishonesty, employment practices liability, fiduciary liability and cyber
risk  for public  corporations,  private  companies and  not-for-profit organizations; professional liability
coverage for  a variety of  professionals  including, among others,  lawyers and design professionals;  and
management  liability,  professional  liability, property, workers’ compensation, auto and general liability
for financial  institutions.

Selected Market  and  Product  Information

The following  table  sets forth Bond &  Specialty Insurance’s net written premiums by product line
for the  periods indicated.  For a description of the product lines referred to in the table, see ‘‘Principal
Markets and Methods  of Distribution’’  and  ‘‘Product Lines,’’ respectively.

(for the year ended December 31, in  millions)

2016

2015

2014

Fidelity  and  surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General  liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 961
954
184

$ 952
952
177

$ 963
961
179

% of Total
2016

45.8%
45.4
8.8

Total Bond  &  Specialty Insurance . . . . . . . . . . . . . . . . . . . . . .

$2,099

$2,081

$2,103

100.0%

Principal Markets and Methods  of  Distribution

Bond &  Specialty  Insurance markets and  distributes the  vast majority of its products in the United

States through  approximately 5,800  of  the same  independent agencies and brokers that  distribute
Business and  International Insurance’s  products  in the United States. Bond &  Specialty  Insurance
builds  relationships  with well-established,  independent insurance agencies and brokers. In selecting new
independent agencies  and  brokers to  distribute its products, Bond & Specialty Insurance  considers,
among  other attributes,  each agency’s  or broker’s  profitability, financial stability, staff experience and
strategic fit with  its operating and  marketing plans.  Once an agency or  broker is appointed, its ongoing
performance is  closely monitored.  Bond  & Specialty  Insurance, in conjunction with Business and
International  Insurance,  continues  to  make investments in  enhanced technology utilizing internet-based
applications  to  provide  real-time interface capabilities with its  independent agencies and brokers.

Pricing  and Underwriting

Bond &  Specialty  Insurance utilizes underwriting, claims, engineering, actuarial and product
development disciplines  for specific accounts and industries, in conjunction  with extensive amounts of
proprietary  data  gathered and  analyzed  over many years, to facilitate  its risk  selection process and
develop pricing  parameters.  The Company utilizes both  standard industry forms and proprietary forms
for the  insurance policies  it issues.

Product Lines

Bond &  Specialty  Insurance writes the  following types of  coverages:

• Fidelity and Surety. Provides  fidelity insurance coverage,  which protects an insured for  loss  due
to embezzlement  or misappropriation of funds  by an  employee, and  surety, which  is a  three-

13

party  agreement whereby  the  insurer agrees  to pay  a third  party  or  make complete  an obligation
in response to  the  default, acts  or omissions of an insured. Surety is generally provided for
construction performance, legal  matters  such as  appeals, trustees  in bankruptcy  and probate  and
other  performance bonds.

• General  Liability. Provides coverage for specialized liability exposures as described above in

more detail in  the  ‘‘Business and  International Insurance’’ section of  this report,  as well as cyber
risk  coverages.

• Other. Coverages include  Property, Workers’ Compensation,  Commercial Automobile and
Commercial  Multi-Peril, which  are described  above in  more detail in the ‘‘Business and
International  Insurance’’  section  of this report.

Net Retention Policy Per Risk

The following  discussion reflects  the Company’s retention  policy  with respect to  Bond &  Specialty
Insurance as of January 1,  2017.  For  third party liability, including  but  not  limited  to umbrella liability,
professional  liability,  directors’  and officers’ liability, employment  practices  liability and  cyber  risk
liability,  Bond  & Specialty Insurance  generally limits  net retentions to  $25.0 million  per  policy.  For
surety protection, where  insured limits  are often significant, Bond &  Specialty Insurance generally
retains up  to $115.0  million probable  maximum loss (PML)  per  principal, after  reinsurance, but  may
retain higher amounts  based  on  the  type of obligation,  credit  quality  and  other  credit  risk factors.
Reinsurance  treaties  often  have  aggregate limits  or  caps which  may  result in  larger net  per  risk
retentions if  the aggregate limits  or  caps are reached.  Bond &  Specialty Insurance utilizes facultative
reinsurance to  provide  additional  limits  capacity or to reduce  retentions  on  an  individual  risk basis.
Bond &  Specialty  Insurance  may also  retain  amounts greater than those described  herein  based  upon
the  individual characteristics  of  the  risk.

Geographic  Distribution

The following  table  shows the geographic distribution of Bond &  Specialty  Insurance’s  direct

written  premiums for  the year  ended  December  31,  2016:

State

California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New  York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

% of
Total

9.5%
7.5
7.2
5.7
4.6
3.9
3.3
3.0
55.3

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) No  other single state accounted for  3.0% or more  of Bond &  Specialty Insurance’s direct

written  premiums  in 2016.

Competition

The competitive  landscape in which  Bond & Specialty Insurance operates is affected by  many  of

the  same factors  described  previously  for Business and International Insurance. Competitors in this

14

market are primarily  national  property  and casualty  insurance companies that  write most  classes of
business  and,  to  a  lesser extent,  regional insurance companies and companies that have developed  niche
programs  for  specific  industry  segments.

Bond &  Specialty  Insurance underwrites  and markets  its products to all sizes of  businesses  and
other  organizations,  as  well as individuals. The Company believes that  its reputation for timely and
consistent decision making,  a nationwide network of local underwriting, claims and industry experts  and
strong producer and customer  relationships, as well as  its ability to offer its customers a full range  of
products, provides Bond & Specialty Insurance an advantage over many of its competitors  and enables
it to  compete  effectively  in  a complex,  dynamic  marketplace. The Company believes that the ability of
Bond &  Specialty  Insurance to  cross-sell its products  to customers of  Business and International
Insurance and  Personal  Insurance  provides additional  competitive advantages for the Company. See
‘‘Item 1A—Risk  Factors—The  intense  competition that we face, and the impact of innovation,
technological  change  and  changing  customer preferences on the insurance  industry and  the markets  in
which we  operate,  could harm  our  ability to  maintain or increase our  business volumes and our
profitability.’’

PERSONAL  INSURANCE

Personal  Insurance  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.

Selected Product and  Distribution  Channel Information

The following  table  sets forth net  written premiums for Personal Insurance’s business  by product
line  for  the periods  indicated.  For  a  description of  the product lines referred to in the following table,
see ‘‘—Product Lines.’’ In  addition, see  ‘‘—Principal Markets and Methods of Distribution’’ for a
discussion of distribution  channels  for  Personal Insurance’s product lines.

(for the year ended December 31, in  millions)

By  product line:

2016

2015

2014

% of Total
2016

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners  and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,327
3,857

$3,700
3,757

$3,390
3,775

52.9%
47.1

Total  Personal  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,184

$7,457

$7,165

100.0%

Principal Markets and Methods  of  Distribution

Personal  Insurance  products are  marketed and distributed primarily  through approximately 10,900
active  independent  agencies  located throughout the  United States, supported by personnel in nine  sales
regions.  In addition, sales and service  are provided to  customers through five contact centers. While the
principal markets  for Personal Insurance  products continue to be in states along the  East Coast,
California  and  Texas,  the business continues to expand  its geographic presence across the United
States.

In  selecting  new independent agencies to  distribute its  products, Personal Insurance considers,
among  other attributes,  each agency’s  profitability, financial stability,  staff experience and strategic  fit
with its  operating  and  marketing  plans.  Once an agency is appointed, Personal Insurance carefully
monitors its performance.

Agents  can access  the Company’s  agency service portal for a number  of resources including

customer service, marketing  and  claims  management. In  addition, agencies  can choose to shift the

15

ongoing service responsibility  for Personal  Insurance’s customers  to one  of the Company’s Customer
Care  Centers,  where  the  Company provides, on  behalf of an agency,  a comprehensive array of
customer service  needs, including response to  billing  and coverage inquiries, and policy changes.
Approximately  1,400  agents take advantage  of  this  service alternative, for which they generally pay a
fee.

Personal  Insurance  also markets and distributes its products through additional channels, including
corporations that make the  company’s  product offerings available to their employees primarily through
payroll deduction,  consumer associations  and affinity  groups. Personal Insurance handles the sales  and
service  for  these programs either through a  sponsoring independent  agent or through the Company’s
contact  center  locations.  In  addition,  since 1995, the Company has had a marketing agreement with
GEICO to underwrite  homeowners  business for certain  of their auto customers.

The Company also  markets its  insurance products  directly to consumers,  largely through online

channels.  The  Company’s investment  in  the direct-to-consumer initiative,  which began in 2009, has
generated  growing but  still modest  premium volume for Personal Insurance in recent  years, reflective  of
the  Company’s targeted customer  base.  The direct-to-consumer initiative, while intended to enhance
the  Company’s long-term  ability to  compete  successfully in a consumer-driven marketplace, is expected
to remain  modest  with respect to premium volume and  remain unprofitable for a number of years.

Pricing  and Underwriting

Personal  Insurance  has developed a product management methodology that integrates the
disciplines of underwriting, claim,  actuarial and  product development. This approach  is designed to
maintain high  quality underwriting discipline  and pricing segmentation. Proprietary data accumulated
over  many years  is  analyzed  and Personal Insurance uses a variety  of risk differentiation models  to
facilitate its  pricing segmentation. The  Company’s product management area  establishes  underwriting
guidelines integrated  with its filed  pricing and rating plans, which enable  Personal Insurance to
effectively  execute  its  risk selection and  pricing  processes.

Pricing for  personal  automobile  insurance is driven  in large  part by changes  in the frequency of

claims  and changes in  severity,  including  inflation in the  cost of automobile repairs, medical care and
resolution of liability  claims.  Pricing  in  the homeowners  business is driven in large part  by changes in
the  frequency  of  claims  and changes  in  severity,  including inflation in the cost of building supplies,
labor and household possessions. In addition to the  normal risks associated with any multiple peril
coverage,  the  profitability  and  pricing  of  both  homeowners and automobile insurance are affected  by
the  incidence of natural  disasters,  particularly those related to weather  and, for homeowners insurance,
earthquakes. Insurers writing personal  lines property  and casualty policies may  be unable to increase
prices  until  some  time after  the  costs  associated with  coverage have increased, primarily because  of
state insurance  rate  regulation. The pace  at which an insurer can change rates in response  to increased
costs depends, in  part, on whether  the  applicable state  law requires prior approval of  rate  increases or
notification  to the  regulator either before or after  a  rate  change is imposed. In states with prior
approval  laws,  rates  must be approved by the  regulator before being used by  the insurer. In states
having  ‘‘file-and-use’’ laws,  the insurer  must file rate changes with the  regulator,  but does  not need  to
wait  for approval  before  using the new rates.  A  ‘‘use-and-file’’ law requires an insurer to file rates
within  a period of  time after the  insurer  begins using the new rate.  Approximately one-half of the
states  require prior  approval of  most  rate changes. In addition, changes to  methods  of marketing and
underwriting in  some  jurisdictions are  subject  to state-imposed restrictions, which can make  it more
difficult for an  insurer to  significantly manage catastrophe exposures.

The Company’s ability or  willingness to raise prices,  modify underwriting terms  or reduce exposure

to certain geographies  may  be limited  due to considerations of public policy, the  competitive
environment,  the evolving political environment  and/or changes in the general economic climate. The

16

Company  also  may  choose to  write  business it might  not otherwise write in some states for strategic
purposes, such  as  improving access  to  other  commercial or personal underwriting opportunities. In
choosing  to write business in  some states, the  Company  also considers the costs  and benefits of those
states’ residual markets and  guaranty  funds,  as well as  other property and casualty business the
Company  writes in  those states.

Product Lines

The primary  coverages in  Personal  Insurance  are  personal automobile and homeowners and other

insurance sold  to individuals.  Personal  Insurance had approximately  6.9 million active policies
(e.g., policies-in-force)  at December  31,  2016.

Personal  Insurance  writes  the  following  types of coverages:

• Personal  Automobile  provides coverage for liability to others for both  bodily  injury and property
damage,  uninsured  motorist  protection, and for physical damage  to  an insured’s  own  vehicle
from collision, fire, flood,  hail and theft.  In  addition,  many  states  require policies  to  provide
first-party  personal  injury protection, frequently  referred  to  as  no-fault  coverage.

• Homeowners and Other provides protection against losses  to  residences 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  also  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.

Net Retention Policy Per Risk

The following  discussion reflects  the Company’s retention  policy  with respect to  Personal  Insurance

as of  January  1, 2017.  Personal  Insurance  generally retains  its  primary personal  auto exposures  in  their
entirety.  For personal  property  insurance, there  is  an  $8.0  million maximum  retention per risk,  net  of
reinsurance.  Personal Insurance uses  facultative reinsurance to provide additional limits  capacity  or  to
reduce retentions on an  individual  risk  basis. Personal Insurance issues umbrella  policies  up  to a
maximum limit  of  $10.0 million  per  risk.  Personal Insurance may also  retain  amounts  greater  than
those  described herein  based  upon the  individual characteristics  of  the  risk.

17

Geographic  Distribution

The following  table  shows  the geographic  distribution of Personal Insurance’s direct written

premiums for  the year ended  December  31,  2016:

State

New  York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New  Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Connecticut
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  others(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

%  of
Total

13.1%
9.9
6.7
6.2
5.2
5.1
5.0
4.1
3.9
3.1
3.0
34.7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100.0%

(1) The percentage  for Texas includes  business written  by the Company through a fronting  agreement

with another  insurer.

(2) No  other single state accounted  for  3.0% or more  of Personal  Insurance’s direct written premiums

in 2016.

Competition

Although  national companies write  the majority  of  this business, Personal Insurance also faces

competition  from many regional and  hundreds of local companies. Personal Insurance primarily
competes based on  breadth of product  offerings, price, service (including claims handling), ease of
doing  business,  stability  of the  insurer  and name  recognition. Personal Insurance competes for business
within  each independent  agency  since  these agencies also  offer policies of competing companies. At the
agency  level,  competition  is  primarily  based on price,  service (including claims handling),  the level  of
automation and the  development of  long-term relationships with individual agents. In recent years,
most independent  personal insurance  agents  have  begun utilizing price comparison  rating technology,
sometimes referred to as ‘‘comparative  raters,’’  as a  cost-efficient means of obtaining quotes from
multiple companies. Because  the use  of  this technology facilitates the  process  of generating multiple
quotes, the technology  has  increased  price comparison  on new business and, increasingly, on renewal
business.  Personal Insurance  also  competes  with insurance companies that use exclusive agents or
salaried employees to sell their products,  as well as  those that employ direct  marketing strategies. See
‘‘Item 1A—Risk  Factors—The  intense  competition that we face, and the impact of innovation,
technological change and  changing customer preferences on the insurance  industry and  the markets  in
which we  operate,  could harm our ability to  maintain or increase our  business volumes and our
profitability.’’

CLAIMS  MANAGEMENT

The Company’s claim  functions are  managed  through its Claims  Services organization, with

locations in  the United  States  and in the  other countries where it  does  business. With more  than  12,000
employees, Claims  Services  employs a  group of professionals with diverse skills, including claim

18

adjusters,  appraisers,  attorneys,  investigators, engineers, accountants, nurses,  system specialists  and
training,  management and support personnel. Approved external service providers, such  as
investigators,  attorneys  and, in the  rare  circumstances  when necessary, independent adjusters and
appraisers, are  available for  use as  appropriate.

United States  field  claim management teams located in  21 claim centers and 53 satellite and
specialty-only  offices  in 45  states  are  organized  to maintain focus on the specific claim characteristics
unique  to  the  businesses within the  Company’s business segments. Claim teams  with specialized skills,
required  licenses,  resources  and workflows  are  matched to  the unique exposures of those businesses,
with local claims management  dedicated  to  achieving optimal results within each segment. The
Company’s home office operations provide  additional support  in the form of workflow design, quality
management, information  technology,  advanced management information and data analysis, training,
financial reporting  and  control, and  human resources strategy. This structure permits the Company  to
maintain the economies  of  scale  of a  large, established  company while retaining the agility to respond
promptly to  the needs  of customers,  brokers,  agents  and  underwriters. Claims management for
International,  while  generally provided  locally  by staff  in the  respective international locations due  to
local knowledge  of applicable  laws  and  regulations, is also managed by the Company’s Claims  Services
organization  in  the Unites States  to leverage that  knowledge base and  to share best practices.

An integral  part of  the Company’s  strategy to benefit  customers and shareholders is  its  continuing

industry  leadership in  the  fight  against  insurance fraud through its Investigative Services unit. The
Company  has a  nationwide  staff  of experts who investigate a wide array of insurance fraud schemes
using in-house  forensic  resources and  other  technological tools. This staff  also has specialized expertise
in fire  scene  examinations,  medical  provider  fraud schemes and data  mining.  The Company also
dedicates  investigative resources  to ensure  that  violations of  law are reported to and prosecuted by  law
enforcement  agencies.

Claims  Services uses technology,  management information and data analysis  to assist the Company

in reviewing its claim practices  and results in  order to evaluate and improve its claims management
performance.  The  Company’s  claims  management strategy is focused on segmentation of  claims and
appropriate  technical specialization to  drive effective claim resolution. The Company continually
monitors its investment in  claim  resources  to maintain an effective focus on  claim  outcomes and a
disciplined approach to  continual improvement.  The  Company operates a state-of-the-art claims
training  facility  which  offers hands-on  experiential learning to help ensure that its claim  professionals
are properly  trained.  In  recent years,  the Company has invested significant additional  resources in many
of  its claim  handling operations  and  routinely  monitors the effect of those investments to ensure a
consistent optimization  among  outcomes, cost and service.

Claims  Services’  catastrophe  response strategy is to respond to a significant catastrophic  event
using its own personnel,  enabling  it  to  minimize  reliance on independent  adjusters and appraisers. The
Company  has developed a  large dedicated catastrophe response team and trained a large Enterprise
Response  Team  of existing employees who can be  deployed  on short notice in the event of a
catastrophe  that generates  claim volume  exceeding the capacity of  the dedicated  catastrophe response
team.  In recent  years,  these internal  resources were  successfully deployed to respond to a record
number  of  catastrophe claims.

REINSURANCE

The Company reinsures a  portion of the risks  it underwrites in order to manage its exposure  to
losses and to protect  its capital. The Company cedes to  reinsurers a portion of these risks and  pays
premiums based upon  the  risk and  exposure of the policies subject to such reinsurance.  The Company
utilizes  a variety of reinsurance agreements to  manage  its exposure to  large property and casualty
losses,  including  catastrophe,  treaty, facultative  and quota share reinsurance. Ceded reinsurance

19

involves credit  risk,  except  with  regard  to mandatory pools and associations, and is predominantly
subject to  aggregate loss  limits. Although the reinsurer is liable to the Company to  the extent of the
reinsurance ceded,  the  Company remains liable  as the direct insurer on all  risks reinsured. Reinsurance
recoverables  are reported  after  reductions  for known insolvencies and after allowances for  uncollectible
amounts. The  Company also  holds collateral, including  trust agreements, escrow funds and letters of
credit,  under  certain reinsurance  agreements. The Company monitors the financial condition of
reinsurers  on  an  ongoing  basis  and  reviews  its reinsurance arrangements periodically. Reinsurers are
selected based  on  their  financial condition, business  practices, the price of their product  offerings and
the  value  of collateral provided. After  reinsurance  is  purchased, the Company has limited  ability to
manage the credit risk  to a  reinsurer.  In addition, in  a number of jurisdictions,  particularly the
European Union  and  the United  Kingdom,  a reinsurer is permitted to transfer a reinsurance
arrangement  to  another reinsurer,  which may be  less creditworthy, without a counterparty’s consent,
provided  that the  transfer  has been approved  by the applicable regulatory and/or  court authority.

For  additional  information  regarding reinsurance, see note 5 of notes to the  consolidated financial

statements and  ‘‘Item 1A—Risk  Factors.’’ For  a description of reinsurance-related litigation, see
note  16  of notes  to  the  consolidated  financial statements.

Catastrophe  Reinsurance

Catastrophes can  be  caused  by  a  variety  of  events, including, among others, hurricanes, tornadoes

and  other  windstorms,  earthquakes, hail, wildfires,  severe winter weather, floods, tsunamis, volcanic
eruptions and other naturally-occurring  events, such as solar flares. Catastrophes can also result from
terrorist  attacks and  other  intentionally  destructive  acts including those involving nuclear, biological,
chemical, radiological,  cyber-attacks,  explosions and  infrastructure failures. The incidence and severity
of  catastrophes  are  inherently unpredictable.  The extent of losses from  a catastrophe is a function of
both the total  amount  of  insured exposure in  the area affected by the event and  the severity of  the
event.  Most catastrophes  are  restricted  to small geographic areas; however, hurricanes and earthquakes
may produce  significant  damage  in larger areas,  especially those  areas that are heavily populated. The
Company  generally  seeks  to manage  its  exposure to catastrophes through individual risk selection  and
the  purchase  of catastrophe reinsurance. The  following discussion summarizes  the Company’s
catastrophe  reinsurance coverage  at January 1, 2017.

Corporate  Catastrophe Excess-of-Loss  Reinsurance  Treaty. This treaty covers the accumulation  of
certain  property losses  arising from  one  or  multiple  occurrences for the period January 1, 2017 through
and  including  December  31,  2017: 75%  ($1.5 billion) of qualifying losses covered  by the treaty  and  25%
($500  million)  of  qualifying losses  retained by  the Company part of  $2.0 billion excess of $3.0 billion.
Qualifying  losses for  each occurrence  are after  a $100 million deductible. The treaty covers all of  the
Company’s exposures  in the  United States and Canada and their territories and possessions, the
Caribbean Islands, Mexico  and  all  waters  contiguous thereto. The treaty only provides  coverage for
terrorism events in  limited circumstances and excludes entirely  losses arising from nuclear, biological,
chemical or radiological  attacks.

Catastrophe  Bonds. The  Company has catastrophe protection through an indemnity reinsurance

agreement with Long Point Re  III  Ltd.  (Long  Point Re III), an independent Cayman Islands company
licensed  as  a  Class  C  insurer  in the  Cayman Islands. The reinsurance agreement expires in  May 2018
and  meets the requirements to  be accounted  for as reinsurance in accordance with the guidance  for
reinsurance contracts. In  connection with  the reinsurance agreement, Long Point Re  III issued notes
(generally referred  to  as  ‘‘catastrophe bonds’’) to investors in amounts equal to the full coverage
provided  under  the reinsurance  agreement as  described below. The proceeds were deposited in a
reinsurance trust  account.  The  businesses covered  by this reinsurance agreement are subsets of the
Company’s overall insurance  portfolio, comprising specified property  coverages spread across the
following geographic locations:  Connecticut, Delaware, District of Columbia, Maine, Maryland,
Massachusetts,  New Hampshire, New Jersey,  New York,  Pennsylvania,  Rhode Island,  Virginia and
Vermont.

20

The reinsurance  agreement  with Long Point  Re III provides coverage of up to $300  million to  the
Company  for losses from  tropical cyclones, earthquakes,  severe thunderstorms or winter storms in the
locations listed  above.  The  attachment  point and  maximum limit under this agreement are reset
annually to adjust  the  expected loss of  the  layer within a  predetermined range. For  the period May 16,
2016 through and  including May 15, 2017, the  Company  is entitled to begin recovering amounts under
this  reinsurance agreement  if the  covered  losses in  the covered area for a single occurrence reach  an
initial attachment amount  of  $1.968  billion. The full $300 million coverage amount is available on a
proportional  basis  until such  covered  losses  reach a maximum $2.468  billion. The coverage under the
reinsurance agreement is limited to  specified property coverage written in Personal Insurance; Select
Accounts,  Middle  Market  (excluding  Excess  Casualty), First Party (excluding Boiler  & Machinery)  and
Specialized Distribution  in  Business  and  International Insurance; and Bond & Specialty Insurance
Other  in  Bond & Specialty Insurance.

Under  the  terms of the  reinsurance  agreement, the  Company is obligated to pay  annual
reinsurance premiums  to Long  Point  Re  III for  the reinsurance coverage. Amounts payable to the
Company  under the  reinsurance  agreement  with  respect to any covered event cannot exceed the
Company’s actual losses  from  such event.  The  principal  amount of the catastrophe bonds will be
reduced by  any amounts paid  to the  Company under the reinsurance agreement.

As with any reinsurance  agreement,  there is credit risk associated with  collecting  amounts due

from  reinsurers.  With  regard  to Long  Point Re III, the  credit risk is mitigated by a reinsurance trust
account  that has been  funded  by  Long  Point Re  III with money market funds that invest solely in
direct  government  obligations and  obligations backed by the U.S. government with  maturities of no
more  than 13  months.  The  money  market funds must have a principal stability rating of at least AAAm
by  Standard &  Poor’s on the issuance  date of the  bonds and thereafter must be rated by Standard &
Poor’s. Other permissible  investments  include  money market funds which invest in repurchase and
reverse  repurchase  agreements  collateralized  by direct government obligations and obligations of any
agency  backed  by  the  U.S. government  with terms of no  more than 397 calendar days, and cash.

At the  time the  agreement  was  entered  into with  Long Point Re  III, the Company evaluated the

applicability  of the  accounting  guidance  that addresses variable interest entities  or VIEs. Under this
guidance,  an entity that  is  formed  for  business purposes  is considered a VIE if: (a) the equity investors
lack the  direct or  indirect  ability through voting  rights or similar rights  to make decisions  about an
entity’s activities  that have a  significant  effect  on the  entity’s operations, or (b) the equity investors  do
not provide sufficient  financial resources for the  entity to support  its activities. Additionally, a company
that  absorbs  a majority of the expected  losses from a  VIE’s activities or is entitled to receive a majority
of  the entity’s  expected  residual returns,  or  both, is considered to be the primary beneficiary of the VIE
and  is required to  consolidate  the VIE  in the company’s  financial statements.

As a result of  the  evaluation  of the  reinsurance  agreement with Long  Point Re III,  the Company

concluded that  it  was  a  VIE  because  the conditions described in items (a) and (b)  above were present.
However, while  Long Point Re III was determined to be a  VIE, the Company concluded  that it did  not
have  a variable interest in  the entity, as  the  variability  in its results, caused by the  reinsurance
agreement,  is expected to  be absorbed  entirely  by the  investors in the catastrophe bonds issued by
Long  Point Re  III  and residual amounts  earned by  it, if  any, are expected to be absorbed by the equity
investors  (the  Company  has  neither an equity nor a residual interest in Long Point Re  III).

Accordingly, the  Company  is not  the primary beneficiary of Long Point Re III and does  not
consolidate that  entity  in  the Company’s consolidated  financial statements. Additionally, because the
Company  has no  intention  to pursue  any transaction  that  would result in it acquiring interest  in and
becoming the primary  beneficiary of  Long  Point Re III, the consolidation of that entity in the
Company’s consolidated financial statements in future  periods is unlikely.

21

The Company has  not incurred  any  losses that have  resulted or are expected to result in a recovery

under  the  Long  Point  Re III agreement  since its inception.

Northeast Property Catastrophe Excess-of-Loss Reinsurance Treaty. This treaty provides up to
$800 million  part of $850 million of  all  perils (coverage for terrorism events in  limited circumstances
and  excludes entirely losses  from nuclear, biological and radiological attacks), subject to a $2.25 billion
retention, from  Virginia  to Maine for  the period July 1,  2016  through and including June 30, 2017.
Losses  from a covered event  (occurring  over several days) anywhere in the United States, Canada,  the
Caribbean and  Mexico  and waters  contiguous  thereto may be used to  satisfy the retention. Recoveries
under  the  catastrophe bonds  (if  any)  would  be first applied to reduce losses subject to this  treaty.

Middle  Market Earthquake Catastrophe Excess-of-Loss Reinsurance  Treaty. This earthquake

excess-of-loss  treaty provides  for  up  to  $150 million part  of $165 million of coverage, subject to a
$70 million retention,  for losses arising  from  an earthquake, including  fire following and sprinkler
leakage  incurred under  policies  written  by Technology, Public Sector Services and Commercial Accounts
in Business and  International  Insurance  for the  period  July 1, 2016 through and including June 30,
2017.

Personal Insurance  Earthquake  Catastrophe Excess-of-Loss Reinsurance Treaty. This earthquake
excess-of-loss  treaty provides  for  up  to  $200 million of coverage, subject  to a $150 million  retention, for
losses arising  from  an  earthquake, including  fire following and sprinkler  leakage incurred under policies
written  by Personal  Insurance for the  period  January  1, 2017 through December  31, 2017.

Canadian Property  Catastrophe  Excess-of-Loss Reinsurance  Treaty. This contract, effective for  the
period July 1, 2016  through and  including  June 30, 2017, covers the  accumulation of  net property losses
arising  out of one occurrence on business written by  the Company’s Canadian businesses.  The treaty
covers  all  property  written  by  the  Company’s  Canadian businesses  for  Canadian  insureds, including,  but
not limited to, habitational property,  commercial  property, inland marine, ocean marine and auto
physical  damages exposures, with respect  to risks  located worldwide, written for Canadian insureds.  The
treaty  provides coverage for  50% of  losses  in excess  of  C$100 million (US$74 million at  December  31,
2016), up to  C$200 million  (US$149  million at December 31, 2016) and for 100% of losses in excess  of
C$200  million (US$149 million at  December  31,  2016),  up to C$600 million (US$446 million  at
December 31, 2016).

Other  International Reinsurance  Treaties. For other business underwritten in Canada,  as well as  for

business  written  in the  United Kingdom, the  Republic of Ireland, Brazil and in the  Company’s
operations at Lloyd’s,  separate reinsurance protections are purchased locally that  have lower net
retentions more  commensurate  with  the  size  of  the respective  local balance sheet. The Company
conducts an  ongoing  review of  its  risk  and catastrophe  coverages  and  makes changes as it deems
appropriate.

Terrorism  Risk Insurance  Program. The Terrorism Risk Insurance Program  is  a Federal  program
administered  by  the Department of the  Treasury authorized through December 31, 2020 that provides
for a system of shared public and  private compensation for certain  insured losses resulting from
certified  acts  of  terrorism.  For a  further  description of the  program, including the Company’s estimated
deductible under  the  program in  2017, see note 5  of  notes to the  consolidated financial statements and
‘‘Item 1A—Risk Factors—Catastrophe losses could materially  and adversely affect  our  results of
operations, our financial  position and/or  liquidity,  and could adversely impact our ratings, our ability to
raise capital and  the  availability  and cost of reinsurance.’’

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CLAIMS  AND  CLAIM ADJUSTMENT  EXPENSE  RESERVES

Claims  and claim  adjustment  expense reserves represent management’s estimate  of ultimate unpaid

costs of losses  and loss  adjustment expenses for  claims that have been reported and claims that have
been incurred  but  not yet reported.

The Company continually refines its  reserve estimates  as part of a regular  ongoing process that

includes review of  key  assumptions,  underlying variables and historical loss experience. The Company
reflects adjustments  to reserves in  the  results of operations in the periods in  which the estimates are
changed.  In establishing  reserves,  the  Company takes into account  estimated recoveries for  reinsurance,
salvage  and subrogation.  The reserves  are also reviewed regularly by qualified actuaries  employed  by
the  Company.  For  additional information on the process  of estimating reserves  and a discussion of
underlying variables and risk  factors,  see ‘‘Item  7—Management’s Discussion and Analysis of Financial
Condition and  Results  of  Operations—Critical Accounting Estimates.’’

The process of estimating  loss  reserves  involves a high  degree  of judgment and is subject to a
number  of  variables. These  variables  (discussed by product  line in the ‘‘Critical Accounting Estimates’’
section  of ‘‘Item 7—Management’s Discussion and  Analysis of Financial Condition and  Results of
Operations’’)  are  affected by  both internal and external  events, such as changes in claims handling
procedures, inflation,  judicial  trends  and legislative changes, among others. The impact of many  of
these items on  ultimate  costs for  claims  and  claim  adjustment expenses is difficult to estimate. Reserve
estimation  difficulties also  differ significantly  by product line due to differences in the underlying
insurance contract (e.g.,  claims-made  versus occurrence), claim complexity, the volume  of claims, the
potential severity of  individual  claims,  the  determination of the occurrence date  for a claim,  and
reporting lags  (the time  between the  occurrence  of  the insured event and when it is actually reported
to the insurer). Informed  judgment  is  applied throughout the process.

The Company derives  estimates for  unreported claims and development with respect to reported

claims  principally from  actuarial  analyses of historical  patterns of loss development by accident year  for
each  type of exposure  and business  unit.  Similarly, the Company  derives estimates of unpaid loss
adjustment  expenses  principally  from  actuarial analyses of historical development patterns of the
relationship of loss adjustment expenses  to losses  for each line of business and type  of exposure. For a
description of the  Company’s reserving  methods for asbestos and environmental claims, see ‘‘Item 7—
Management’s Discussion  and Analysis  of  Financial Condition and  Results of Operations—Asbestos
Claims  and Litigation,’’ and  ‘‘—Environmental  Claims  and Litigation.’’

Certain of the Company’s  claims  and claim adjustment expense reserves are discounted to present

value.  See  note 7 of notes  to  the  consolidated financial  statements for further discussion.

Reserves on  Statutory Accounting  Basis

At December 31, 2016,  2015 and 2014, claims  and claim adjustment expense reserves (net of

reinsurance) prepared  in accordance  with  U.S. generally accepted accounting principles (GAAP
reserves)  were $44 million  higher, $41 million higher  and $29 million higher, respectively, than those
reported in the  Company’s  respective  annual  reports filed with insurance regulators, which are
prepared in accordance  with  statutory  accounting  practices  (statutory reserves).

The differences  between GAAP and statutory  reserves  are primarily due to the  differences in

GAAP and  statutory  accounting for  two  items: (1) fees associated  with billing of required
reimbursements  under large deductible business, and (2)  the accounting for  retroactive  reinsurance. For
large deductible business,  the Company  pays the deductible  portion of a casualty insurance claim and
then  seeks  reimbursement from the insured, plus a fee. This fee is reported as fee income for GAAP
reporting, but as an  offset to claim  expenses  paid for  statutory reporting. Retroactive reinsurance
balances result  from  reinsurance placed  to  cover  losses on insured events occurring prior to the

23

inception of a reinsurance contract.  For  GAAP reporting, retroactive reinsurance balances are included
in reinsurance recoverables  and  result  in lower  net reserve amounts. Statutory accounting practices
require retroactive reinsurance  balances  to be  recorded in other  liabilities as  contra-liabilities rather
than in loss reserves.

Asbestos  and  Environmental  Claims

Asbestos  and environmental claims  are  segregated from other claims and are handled separately  by

the  Company’s Special  Liability  Group,  a separate  unit staffed by dedicated legal, claim, finance and
engineering professionals.  For  additional information on asbestos and environmental claims, see
‘‘Item 7—Management’s  Discussion and  Analysis  of  Financial Condition and  Results of  Operations—
Asbestos Claims  and Litigation’’  and  ‘‘—Environmental Claims  and Litigation.’’

INTERCOMPANY  REINSURANCE  POOLING ARRANGEMENTS

Most of  the Company’s  domestic  insurance subsidiaries are  members  of an intercompany  property

and  casualty  reinsurance pooling  arrangement. Pooling  arrangements permit the participating
companies  to  rely  on  the capacity  of the  entire pool’s statutory capital and surplus rather than just on
its  own  statutory capital  and  surplus.  Under  such  arrangements, the  members share substantially all
insurance business  that is  written  and  allocate the  combined premiums, losses and expenses.

RATINGS

Ratings  are an  important factor  in assessing the Company’s competitive position in the insurance
industry. The Company receives  ratings  from the  following major rating agencies: A.M. Best Company
(A.M.  Best),  Fitch  Ratings  (Fitch),  Moody’s Investors  Service (Moody’s) and  Standard  & Poor’s Corp.
(S&P).  Rating  agencies  typically  issue  two  types of ratings  for insurance companies: claims-paying  (or
financial strength) ratings,  which reflect  the rating agency’s assessment of  an insurer’s ability to meet its
financial obligations  to policyholders,  and debt ratings,  which reflect  the rating agency’s assessment  of  a
company’s prospects  for  repaying  its  debts and  are  considered by lenders  in connection with the setting
of  interest rates  and terms  for a company’s short-  and long-term borrowings. Agency ratings are not  a
recommendation to  buy,  sell  or hold  any security,  and they  may be revised or withdrawn  at any time by
the  rating  agency. Each agency’s rating  should be evaluated independently of any other agency’s rating.
The system and  the number  of rating  categories  can vary widely from rating agency to rating agency.
Customers usually  focus on  claims-paying ratings,  while  creditors focus on debt ratings. Investors use
both to  evaluate a  company’s  overall  financial  strength. The ratings issued on the Company or its
subsidiaries by  any  of these  agencies are  announced  publicly and are available on the Company’s
website  and  from  the agencies.

A  downgrade  in  one  or  more  of the  Company’s  claims-paying ratings could negatively impact the
Company’s business  volumes and  competitive position because demand for  certain of its  products  may
be  reduced, particularly because  some  customers require that the Company maintain minimum ratings
to enter into, maintain or  renew business with  it.

Additionally,  a downgrade in one or more  of  the Company’s debt ratings could adversely impact

the  Company’s ability to access the capital  markets and other  sources of funds, including in the
syndicated bank  loan  market, and/or  result in higher financing costs. For  example, downgrades in  the
Company’s debt ratings could  result in higher interest  expense under the Company’s revolving credit
agreement (under  which the cost  of  borrowing  could range from  LIBOR plus 87.5 basis  points to
LIBOR  plus 150  basis points, depending on the Company’s debt ratings),  the Company’s commercial
paper program,  or in  the event  that the  Company  were to access the capital markets by issuing debt or
similar types of  securities. See  ‘‘Item  7—Management’s Discussion and Analysis of Financial Condition
and  Results  of  Operations—Liquidity  and Capital Resources’’ for a discussion of the Company’s

24

revolving  credit agreement  and  commercial  paper  program. The Company  considers the level of
increased  cash  funding  requirements in  the event of a ratings downgrade as part of the evaluation of
the  Company’s liquidity requirements.  The Company currently believes that a one- to  two-notch
downgrade in  its  debt  ratings would  not  result in  a material increase in interest expense under its
existing credit  agreement and  commercial paper programs. In addition, the Company considers the
impact of  a  ratings  downgrade  as  part  of the  evaluation of its common share repurchases.

Claims—Paying  Ratings

The following  table  summarizes  the  current  claims-paying (or financial strength) ratings  of the

Travelers Reinsurance  Pool, Travelers  C&S Co. of America, Travelers Personal Insurance  single state
companies, Travelers  C&S  Co. of  Europe, Ltd., Travelers Insurance Company of Canada, The
Dominion of Canada General  Insurance  Company and Travelers Insurance Company Limited as of
February 16,  2017.  The  table presents  the position of each rating in the applicable agency’s rating  scale.

Travelers Reinsurance Pool(a)(b) .
Travelers C&S  Co.  of America . . .
First Floridian  Auto and  Home

Ins. Co.

. . . . . . . . . . . . . . . . .

The Premier Insurance Company

of Massachusetts . . . . . . . . . . .

Travelers C&S Co. of

A.M. Best

Moody’s

S&P

Fitch

A++  (1st of  16) Aa2  (3rd of  21)
A++ (1st of  16) Aa2  (3rd of  21)

AA (3rd of  21) AA (3rd of 21)
AA (3rd of  21) AA (3rd of 21)

A(cid:4)  (4th of  16)

A (3rd of  16)

—

—

— AA  (3rd of 21)

—

Europe, Ltd.

. . . . . . . . . . . . .

A++  (1st of  16) Aa2  (3rd of  21)

AA (3rd of 21)

Travelers Insurance Company of

Canada . . . . . . . . . . . . . . . . .

A++  (1st of 16)

The Dominion of Canada

General Insurance Company . .

A  (3rd of  16)

Travelers Insurance  Company

Limited . . . . . . . . . . . . . . . . .

A  (3rd of  16)

—

—

—

AA(cid:4)  (4th of  21)

—

AA (3rd of 21)

—

—

—

—

—

(a) The Travelers Reinsurance Pool  consists of: The Travelers Indemnity  Company,  The Charter Oak Fire

Insurance Company, The Phoenix Insurance  Company,  The Travelers  Indemnity Company of
Connecticut, The Travelers Indemnity  Company  of  America,  Travelers  Property Casualty  Company of
America, Travelers Commercial  Casualty Company,  TravCo  Insurance  Company,  The Travelers  Home
and Marine Insurance Company, Travelers  Casualty and  Surety Company,  Northland Insurance
Company, Northfield Insurance Company,  Northland Casualty  Company,  American  Equity  Specialty
Insurance Company, The Standard Fire  Insurance  Company, The Automobile Insurance  Company of
Hartford, Connecticut, Travelers Casualty  Insurance Company  of  America,  Farmington  Casualty
Company, Travelers Commercial Insurance  Company,  Travelers Casualty Company of Connecticut,
Travelers Property Casualty Insurance  Company,  Travelers  Personal Security  Insurance Company,
Travelers Personal Insurance Company,  Travelers  Excess  and  Surplus  Lines Company, St.  Paul  Fire and
Marine Insurance Company,  St.  Paul Surplus Lines  Insurance  Company, The  Travelers  Casualty
Company, St. Paul Protective Insurance  Company, Travelers Constitution  State Insurance  Company,
St. Paul  Guardian Insurance Company, St.  Paul Mercury  Insurance Company,  Fidelity  and Guaranty
Insurance Underwriters, Inc., Discover Property &  Casualty Insurance Company, Discover Specialty
Insurance Company and United States  Fidelity  and  Guaranty  Company.

(b) The following  affiliated companies are 100%  reinsured by  one of  the pool participants  noted in

(a) above: Fidelity and Guaranty Insurance  Company,  Gulf  Underwriters Insurance  Company,  American
Equity Insurance Company, Select Insurance Company, The  Travelers  Lloyds  Insurance  Company  and
Travelers Lloyds  of Texas Insurance  Company.

25

Debt Ratings

The following  table  summarizes  the  current  debt, trust preferred securities and commercial paper

ratings of the  Company and  its  subsidiaries as  of  February 16, 2017. The table also presents the
position of each rating  in  the  applicable  agency’s rating scale.

Senior  debt
Subordinated  debt
Junior  subordinated

. . . . . . . . .
. . . .

debt . . . . . . . . . . . . .

Trust  preferred

A.M. Best

Moody’s

S&P

Fitch

a+ (5th of 22) A2 (6th of 21)
a(cid:4) (7th of 22) A3 (7th of 21)

A (6th of 22)
A(cid:4) (7th of 22)

A (6th of 22)
BBB+ (8th of 22)

bbb+  (8th of 22) A3 (7th of 21)

BBB+ (8th of 22)

BBB+ (8th of 22)

securities . . . . . . . . .
Commercial  paper . . . .

bbb+  (8th of 22) A3 (7th of 21)
P-1 (1st of 4)

AMB-1+(1st of 6)

BBB+ (8th of 22)
A-1 (2nd of 10)

BBB+ (8th of 22)
F-1 (2nd of 8)

Rating Agency  Actions

The following  rating agency  actions  were taken with respect to the Company from February 11,

2016,  the date on  which  the Company  filed  its  Annual  Report on Form 10-K for the year ended
December 31, 2015,  through  February  16,  2017:

• On July  22,  2016,  A.M. Best  affirmed  all ratings of the Company, except ratings for Travelers
Insurance Company Limited, which were  affirmed on December 23, 2016. The outlook for all
ratings  is  stable.

• On September  19, 2016,  Fitch  affirmed all ratings of the Company.  The outlook for all ratings  is

stable.

INVESTMENT  OPERATIONS

The majority of  funds  available for  investment are deployed in a widely diversified portfolio of
high  quality, liquid, taxable  U.S. government,  tax-exempt U.S.  municipal and taxable corporate and
U.S. agency  mortgage-backed  bonds.  The  Company  closely monitors the  duration of its fixed maturity
investments, and  the  Company’s  investment purchases and sales are executed with the objective of
having  adequate  funds  available  to  satisfy its  insurance and debt obligations. Generally,  the expected
principal and  interest payments  produced  by the Company’s fixed maturity portfolio adequately fund
the  estimated runoff of the Company’s  insurance  reserves.  The Company’s management of the  duration
of  the fixed  maturity  investment  portfolio, including its use of Treasury futures at times, has produced a
duration  that is less  than the estimated  duration of the  Company’s net insurance liabilities.  The
substantial amount by which the  fair  value  of the fixed maturity portfolio exceeds the value of the net
insurance liabilities,  as  well  as the positive  cash  flow  from newly sold policies and the large amount of
high  quality  liquid  bonds, contributes  to  the Company’s ability to fund claim payments without having
to sell  illiquid  assets  or access  credit  facilities.

The Company also  invests  much smaller amounts in equity securities, real estate, private equity
limited partnerships,  hedge funds,  and real estate partnerships and joint ventures. These investment
classes have the  potential  for higher  returns  but also  involve varying degrees of  risk, including less
stable  rates of  return and  less liquidity.

See note 3 of  notes to  the  consolidated financial statements for additional information regarding

the  Company’s investment portfolio.

26

REGULATION

U.S.  State and Federal Regulation

TRV’s  domestic  insurance  subsidiaries are collectively  licensed to transact insurance business  in all
U.S. states,  the District of Columbia,  Guam,  Puerto Rico and the U.S. Virgin Islands and are  subject to
regulation in the  various  states  and  jurisdictions  in which  they transact business. The extent of
regulation varies,  but  generally  derives  from statutes that  delegate  regulatory, supervisory and
administrative authority  to  a department of insurance in each  state  and  jurisdiction. The regulation,
supervision and  administration  relate,  among other things, to standards of solvency that must be met
and  maintained,  the licensing  of insurers and their  agents, the nature of and limitations on investments,
premium rates, restrictions  on  the size  of risks  that  may be  insured under a single policy, reserves and
provisions  for  unearned premiums, losses and  other obligations,  deposits of securities  for the benefit  of
policyholders, approval  of policy  forms  and the regulation of market conduct, including the use of
credit  information  in  underwriting  as  well as other underwriting and claims practices. State insurance
departments  also  conduct  periodic  examinations of the  financial  condition and market conduct of
insurance companies  and  require  the  filing of financial and  other reports on a quarterly and annual
basis.

State insurance regulation continues  to evolve in  response  to the changing economic and business

environment as well as efforts  by  regulators internationally to develop a consistent approach to
regulation. While  the  U.S. federal  government  has not  historically regulated the  insurance business, the
Dodd-Frank  Wall  Street Reform and  Consumer Protection Act of 2010 established a Federal Insurance
Office  (FIO)  within  the U.S. Department of the Treasury. While the FIO has limited regulatory
authority, it  has  been active in  the  discussions to develop international regulatory standards for the
insurance industry.  In  response  to these  international efforts, the state insurance  regulators, through  the
National  Association of  Insurance  Commissioners  (NAIC), are working with the Federal Reserve and
the  FIO  to consider  and  develop  changes to the  U.S. regulatory framework.

These  changes  are  evidenced  by the incorporation of supervisory colleges into the U.S.  regulatory

framework.  A supervisory  college  is a  forum  of  the regulators having jurisdictional  authority over a
holding  company’s  various insurance  subsidiaries,  including foreign insurance subsidiaries, convened  to
meet with the insurer’s executive management, to  evaluate  the insurer from both a group-wide and
legal-entity  basis.  Some of the items  evaluated during the colleges include the insurer’s business
strategies,  enterprise  risk  management  and corporate  governance.

While insurance  in  the  United States is regulated  on a legal-entity basis, the NAIC has adopted

changes  to its Model  Holding Company  Act  that some states, including the State of Connecticut, have
enacted  to allow  the  insurance  commissioner  to  be designated as the  group-wide supervisor (i.e., lead
regulator) for  the insurance holding  company system based upon certain criteria, including  the place of
domicile of the insurance  subsidiaries  holding the majority of  the insurance group’s premiums, assets,
or liabilities. Based  upon these criteria,  the  State of Connecticut Insurance Department is designated as
TRV’s  lead regulator and  conducts  the supervisory colleges for the Company.

Insurance  Regulation Concerning Dividends from Insurance Subsidiaries. TRV’s principal domestic

insurance subsidiaries  are domiciled  in  the state  of  Connecticut. The Connecticut  insurance holding
company laws require notice to, and  approval by, the  state insurance commissioner for the declaration
or payment  of  any  dividend from  an  insurance  subsidiary that, together with  other distributions  made
within  the preceding  twelve months,  exceeds the greater  of 10% of the insurance subsidiary’s statutory
capital and surplus  as  of  the preceding  December 31, or the  insurance subsidiary’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.

27

The insurance  holding company laws  of other states in  which TRV’s domestic insurance
subsidiaries are domiciled  generally  contain similar, although in some instances somewhat more
restrictive, limitations on  the  payment  of dividends.

Rate  and Rule  Approvals. TRV’s domestic insurance subsidiaries are subject to each state’s  laws

and  regulations  regarding  rate  and  rule  approvals. The applicable laws and regulations  generally
establish  standards  to ensure that  rates  are not excessive,  inadequate, unfairly discriminatory or used to
engage in unfair  price competition.  An  insurer’s  ability  to adjust rates and the  relative timing of the
process  are dependent  upon  each state’s  requirements. Many states have  enacted variations  of
competitive ratemaking  laws,  which allow  insurers  to set certain  premium rates for  certain classes of
insurance without  having  to obtain  the  prior  approval of  the state insurance department.

Requirements  for Exiting Geographic  Markets and/or Canceling or Nonrenewing Policies. Several
states  have laws  and regulations  which  may  impact the  timing and/or  the ability of an insurer to either
discontinue or substantially  reduce  its  writings in  that  state. These laws and  regulations typically require
prior notice, and  in  some  instances  insurance  department approval, prior to discontinuing  a  line of
business  or  withdrawing  from that  state,  and they  allow  insurers to cancel or non-renew certain policies
only for  certain specified  reasons.

Assessments  for  Guaranty Funds  and  Second-Injury  Funds and  Other  Mandatory Assigned Risk and
Reinsurance Arrangements. Virtually  all states require insurers licensed to do business in  their state,
including TRV’s  domestic insurance  subsidiaries,  to bear a  portion of the loss suffered by some
claimants because  of  the  insolvency of  other insurers.  Many states also  have laws that establish second-
injury funds to  provide compensation  to  injured  employees for aggravation of a prior condition or
injury.

TRV’s  domestic  insurance  subsidiaries are also required to  participate in various involuntary
assigned risk  pools,  principally  involving  workers’ compensation, automobile insurance, property
windpools  in  states  prone  to property  damage from hurricanes and FAIR plans, as well as automobile
assigned risk  plans  the  results  of which  are not  pooled with other carriers, which  provide various
insurance coverages  to  individuals  or  other entities that  otherwise  are  unable to purchase that coverage
in the  voluntary  market.

Assessments may  include  any  charge mandated  by statute or regulatory authority that is related

directly or indirectly  to  underwriting  activities. Examples of  such mechanisms include, but are not
limited to, the  Florida  Hurricane  Catastrophe  Fund,  Florida Citizens Property Insurance Corporation,
National  Workers’  Compensation Reinsurance  Pool, various workers’ compensation related funds
(e.g., the Florida Special  Disability  Trust),  North  Carolina Beach Plan, Louisiana Citizens Property
Insurance Corporation,  and  the  Texas  Windstorm Insurance Association. Amounts payable or paid as  a
result of  arrangements  that are  in substance reinsurance, including certain involuntary pools where
insurers are  required to assume  premiums and losses from those pools, are accounted for as
reinsurance (e.g.,  National Workers’  Compensation  Reinsurance Pool, North Carolina Beach Plan).
Amounts related  to  assessments from  arrangements that are not reinsurance are reported as a
component of ‘‘General and Administrative  Expenses,’’  such as the Florida Special Disability Trust.  For
additional  information concerning assessments for guaranty funds  and  second-injury  funds  and other
mandatory  assigned  risk  and  reinsurance agreements  including state-funding mechanisms, see
‘‘Item 1A—Risk  Factors.’’

Insurance  Regulatory Information System. The NAIC developed the Insurance  Regulatory
Information  System (IRIS)  to help  state  regulators  identify  companies that may  require  regulatory
attention. Financial  examiners review  annual financial  statements and the results of  key financial  ratios
based  on  year-end  data  with the goal  of  identifying  insurers  that  appear  to  require  immediate
regulatory attention.  Each  ratio  has an  established ‘‘usual range’’ of results.  A  ratio  result  falling

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outside the usual range, however, is not  necessarily considered adverse; rather, unusual values  are used
as part  of the regulatory early  monitoring system. Furthermore,  in some years, it may not be unusual
for financially  sound companies to  have  several  ratios with results outside the usual ranges. Generally,
an  insurance company  may  become  subject to regulatory scrutiny or, depending  on the company’s
financial condition, regulatory  action  if  certain  of its key  IRIS ratios fall outside the usual ranges and
the  insurer’s  financial  condition is trending downward.

Based on preliminary  2016  IRIS ratios calculated by the  Company for its lead domestic insurance

subsidiaries, The  Travelers  Indemnity  Company  had results outside the normal range for one IRIS ratio
due to the size of  its  investments  in  certain non-fixed  maturity securities, while Travelers Casualty and
Surety  Company  and  St. Paul Fire and  Marine Insurance Company had results outside the normal
range for one IRIS  ratio due  to the  amount of  dividends received from their subsidiaries. In 2015, The
Travelers Indemnity Company  and Travelers Casualty  and Surety Company had results outside the
normal range for these  same  ratios.

Management does  not  anticipate  regulatory action as a result of the 2016  IRIS ratio results  for  the

lead insurance  subsidiaries  or their  insurance subsidiaries. In all instances  in prior years, regulators
have  been satisfied  upon  follow-up  that  no regulatory  action was required.

Risk-Based Capital  (RBC)  Requirements. The NAIC has an RBC requirement which sets  forth
minimum  capital  standards  for  most  property and casualty  insurance  companies and is  intended to raise
the  level  of protection for  policyholder  obligations.  The Company’s  U.S.  insurance  subsidiaries  are
subject to  these NAIC RBC requirements based  on laws  that  have been adopted by  individual  states.
These  requirements subject  insurers having policyholders’  surplus  less than that  required  by  the  RBC
calculation  to varying  degrees of  regulatory action,  depending  on the  level  of  capital  inadequacy.  Each
of  the Company’s  U.S.  insurance subsidiaries had  policyholders’  surplus  at  December 31, 2016
significantly  above the  level at  which  any  RBC regulatory  action would occur.

While there  is currently  no  group  regulatory capital requirement in  the  United  States,  a

comparison of  an  insurer’s  policyholders’  surplus  on  a combined  basis  to the  legal entity  NAIC  RBC
requirements on a  combined  basis can  provide  useful  information regarding an  insurance  group’s
overall capital adequacy in the U.S.  The  amount  of  policyholders’ surplus held by the  Company’s  U.S.
insurance subsidiaries  at December  31,  2016 determined on a  combined  basis  significantly  exceeded  the
level at  which  the  subsidiaries would  be  subject to  RBC  regulatory  action  (company  action  level)  on a
combined  basis at that  date.

The formulas have not  been designed to differentiate  among  adequately  capitalized  companies that
operate with  levels  of  capital  above the  RBC requirement.  Therefore, it is  inappropriate  and  ineffective
to use  the formulas  to  rate or to  rank  these companies.

Investment  Regulation.

Insurance  company investments  must comply  with applicable laws and

regulations which  prescribe  the  kind,  quality and concentration  of  investments.  In general, these laws
and  regulations permit investments in  federal, state and municipal obligations,  corporate bonds,
preferred and  common  equity  securities,  mortgage loans, real  estate  and certain  other investments,
subject to  specified  limits  and  certain  other qualifications.  At  December  31,  2016,  the  Company was in
compliance  with these  laws  and  regulations.

International  Regulation

TRV’s  insurance subsidiaries  based in  Canada,  and  the Canadian  branch  of  one of  the Company’s
U.S. insurance subsidiaries, are  regulated for  solvency purposes  by the Office  of  the  Superintendent of
Financial  Institutions (OSFI)  under the  provisions of the  Insurance Companies Act  (Canada).  These
Canadian subsidiaries and  the Canadian branch  are  also subject  to  Canadian  provincial  and  territorial

29

insurance legislation which regulates  market  conduct, including pricing, underwriting, coverage and
claim conduct,  in varying  degrees  by  province/territory and by product  line.

TRV’s  insurance  subsidiaries  based  in the United Kingdom are regulated by two regulatory bodies,

The Prudential  Regulation Authority  (PRA) and The  Financial Conduct Authority (FCA). The PRA’s
primary  objective is to promote  the  safety and  soundness of insurers for  the protection of policyholders,
while  the FCA  has  three  operational  objectives:  (i) to  secure an appropriate  degree of protection  for
consumers, (ii) to  protect and enhance  the  integrity  of  the UK financial system,  and (iii) to  promote
effective  competition  in  the  interests  of  consumers.  TRV’s  insurance operations in the Republic of
Ireland are conducted  through the  Irish  branch of Travelers Insurance Company Limited which is
supervised  by the  Insurance  Supervision  Departments of the  Central Bank of  Ireland (as to conduct)
and  also  by the  PRA.

TRV’s  managing agency (Travelers  Syndicate Management Limited) (TSML) of its Lloyd’s
syndicate (Syndicate 5000) is  also regulated  by the PRA and the FCA, which have delegated certain
regulatory responsibilities  to the  Council  of Lloyd’s.  Travelers Syndicate 5000 is able to write business
in over  75 jurisdictions  throughout the  world by virtue of Lloyd’s international licenses.  In  each such
jurisdiction,  the policies  written by  TSML,  as part  of Lloyd’s, are subject to  the laws and  insurance
regulations of  that jurisdiction.  Travelers  Underwriting  Agency Limited, which as an insurance
intermediary  is  regulated  by  the  FCA,  produces  insurance business for Travelers Syndicate 5000.

A  TRV subsidiary,  Travelers  Casualty and Surety Company, has a  representative office  in China.

The representative  office is regulated  by the China  Insurance Regulatory  Commission. A TRV
subsidiary, TCI Global Services,  Inc.,  has a liaison office in India. Insurance business  in India is
regulated  by the  Insurance Regulatory  and  Development  Authority. TRV’s Brazilian operations are
regulated  by the  Superintendencia  de  Seguros Privados (SUSEP).

Regulators  in  these  jurisdictions  require insurance  companies to maintain certain levels of capital

depending on,  among  other  things, the  type and amount of insurance policies in force.  Each of the
Company’s foreign  insurance  subsidiaries  had capital  above their respective regulatory requirements at
December 31, 2016.

Insurance  Holding  Company  Statutes

As a holding  company,  TRV  is  not  regulated as  an insurance company. However, since TRV owns
capital stock  in insurance subsidiaries,  it  is subject to  state  insurance holding company statutes, as well
as certain other  laws, of each  of its  insurance  subsidiaries’ states of domicile. All holding company
statutes,  as  well as other  laws,  require  disclosure and, in  some instances, prior approval of material
transactions  between  an  insurance  company and an affiliate. The holding company  statutes and  other
laws also  require,  among  other  things,  prior approval  of  an acquisition of control of a domestic insurer,
some  transactions  between  affiliates  and  the payment of extraordinary dividends or distributions.

Insurance  Regulations Concerning Change of Control. Many state insurance regulatory laws contain

provisions  that require  advance  approval  by state  agencies of any change  in control of  an insurance
company that  is  domiciled, or, in  some  cases, having substantial business that it is deemed  to be
commercially domiciled,  in that  state.

The laws  of many  states also  contain provisions  requiring pre-notification to state agencies prior to
any change in  control of  a non-domestic  insurance company admitted to transact business in that state.
While these  pre-notification statutes  do  not  authorize the state agency to disapprove the change of
control,  they  do  authorize issuance of  cease and  desist  orders with respect to the non-domestic insurer
if  it is determined  that some  conditions, such  as undue market concentration, would result from the
acquisition.

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Any transactions that  would constitute  a change in control of any of TRV’s insurance  subsidiaries

would  generally  require  prior approval  by the insurance  departments of the states in  which the
insurance subsidiaries  are domiciled  or  commercially domiciled. They may also require pre-acquisition
notification  in those  states  that  have  adopted pre-acquisition notification provisions and in which  such
insurance subsidiaries  are admitted to  transact business.

Two  of  TRV’s  insurance  subsidiaries and  its operations  at Lloyd’s are domiciled in the United

Kingdom. Insurers in the  United  Kingdom are subject to change of  control restrictions, including
approval  of the PRA  and  FCA.  TRV’s  insurance subsidiaries  domiciled in, or authorized to conduct
insurance business  in,  Canada are  also  subject to regulatory change of control restrictions, including
approval  of OSFI. TRV’s  Brazilian operations are subject to  regulatory change of control and other
share  transfer restrictions, including approval  of  SUSEP.

These  requirements  may deter,  delay or prevent transactions affecting the control of or  the
ownership of  common  stock,  including  transactions that could be advantageous to  TRV’s shareholders.

Regulatory Developments

For  a  discussion of  domestic and  international regulatory  developments, see ‘‘Item 1A—Risk
Factors’’ including ‘‘Changes  in federal  regulation could impose significant burdens on  us and otherwise
adversely  impact  our  results’’  and ‘‘Regulatory  changes outside  of the United States,  including  in
Canada and the  European Union,  could adversely impact our  results of operations and  limit our
growth.’’

ENTERPRISE  RISK  MANAGEMENT

As a large  property  and  casualty insurance  enterprise, the  Company is exposed  to many risks.
These  risks are a  function of the environments within  which the Company operates. Since certain risks
can be  correlated  with  other risks,  an  event or a series of events can impact multiple areas of the
Company  simultaneously and have a  material effect on  the Company’s results of operations, financial
position and/or liquidity.  These exposures require  an  entity-wide view of risk and an  understanding of
the  potential  impact  on  all  aspects of  the  Company’s operations. It  also  requires the Company to
manage its  risk-taking  to  be within its  risk  appetite in  a  prudent and balanced effort to create and
preserve  value  for  all  of the  Company’s  stakeholders. This approach to Company-wide risk evaluation
and  management is commonly  called  Enterprise Risk Management (ERM). ERM activities involve
both the identification  and  assessment  of  a broad range of risks and the execution of synchronized
strategies  to effectively  manage  such  risks. Effective ERM also includes the determination of the
Company’s risk capital needs,  which takes into  account  regulatory requirements and credit rating
considerations, in  addition  to  economic  and other factors.

ERM at  the  Company  is  an integral part  of  its business operations. All corporate leaders and the
Board of Directors  are  engaged in  ERM. ERM involves  risk-based analytics, as well as  reporting and
feedback throughout the  enterprise in  support of the  Company’s long-term financial strategies and
objectives.

The Company uses various  analyses  and methods, including proprietary and third-party computer
modeling  processes, to make underwriting and  reinsurance  decisions designed to manage its exposure
to catastrophic events. In  addition to  catastrophe  modeling and analysis,  the Company also models and
analyzes its exposure to  other extreme  events. The Company also utilizes proprietary and third-party
computer modeling  processes  to evaluate capital adequacy. These analytical  techniques are an integral
component of the  Company’s ERM  process  and  further support the Company’s  long-term financial
strategies  and objectives.

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In  addition  to  the day-to-day  ERM  activities  within the  Company’s operations, key internal risk
management  functions  include, among  others, the Management and Operating Committees  (comprised
of  the Company’s  Chief  Executive  Officer  and  the other most senior members of management), the
Enterprise  and Business  Risk  Committees of management, the Credit  Committee, Chief Legal Officer,
General Counsel,  the Chief Ethics and  Compliance Officer, the Corporate Actuarial group, the
Corporate Audit  group,  the Corporate  Controller group, the Accounting Policy group and the
Enterprise  Underwriting group,  among  others. A senior executive team  comprised of the Executive
Vice President  of ERM, the  Chief  Risk  Officer and  the Chief Underwriting Officer oversees  the
ERM process.  The  mission  of  this  team  is to facilitate risk assessment  and to collaborate in
implementing  effective  risk  management strategies throughout the Company. Another strategic ERM
objective of  this  team  includes  working  across  the Company  to enhance  effective and realistic  risk
modeling  capabilities  as  part  of  the  Company’s overall  effort to understand and  manage its portfolio of
risks  to  be within  its  risk appetite.  Board  oversight of ERM is  provided  by the Risk Committee of the
Board of Directors, which reviews the  strategies, processes and controls  pertaining to the Company’s
insurance operations and  oversees  the  implementation,  execution  and  performance of the Company’s
ERM program.

The Company’s  ERM efforts  build  upon the  foundation  of an effective  internal control

environment.  ERM  expands  the internal control  objectives  of effective and efficient operations, reliable
financial reporting  and  compliance with  applicable  laws and  regulations, to fostering, leading and
supporting  an  integrated, risk-based  culture within the Company that focuses on  value  creation and
preservation.  However,  the Company  can  provide  only reasonable, not absolute, assurance that these
objectives will  be  met. Further, the design of any  risk management or control system  must reflect the
fact that  there are resource constraints,  and the benefits must be considered relative  to their costs. As a
result, the  possibility of material financial loss  remains  in spite of the Company’s significant
ERM efforts. An  investor should  carefully consider the  risks and all of the  other information set forth
in this  annual  report,  including  the  discussions  included  in ‘‘Item 1A—Risk Factors,’’ ‘‘Item  7A—
Quantitative  and  Qualitative Disclosures About Market Risk,’’ and ‘‘Item 8—Financial Statements  and
Supplementary  Data.’’

OTHER  INFORMATION

Customer  Concentration

In  the opinion  of the  Company’s management, no  material part of the business of  the Company

and  its subsidiaries  is  dependent  upon  a  single customer or group of customers, the loss  of any one  of
which would have  a  material  adverse  effect on  the Company, and  no one customer or group of
affiliated  customers accounts  for 10%  or more of  the Company’s  consolidated revenues.

Employees

At December 31, 2016,  the Company  had approximately 30,900 employees. The Company believes
that  its  employee relations are  satisfactory.  None of the  Company’s  employees are subject  to collective
bargaining  agreements.

Sources of Liquidity

For  a  discussion of  the Company’s  sources of funds and maturities of the long-term debt of the

Company, see  ‘‘Item  7—Management’s Discussion and Analysis of  Financial Condition and Results  of
Operations—Liquidity  and Capital Resources,’’ and note 8 of notes to the  consolidated financial
statements.

32

Taxation

For  a  discussion of  tax matters affecting  the Company and its operations, see note 12  of notes to

the  consolidated  financial  statements.

Financial Information about Reportable Business  Segments

For  financial  information  regarding reportable business segments of the  Company, see ‘‘Item 7—
Management’s Discussion  and Analysis  of  Financial Condition and  Results of Operations,’’ and note 2
of  notes  to the  consolidated  financial  statements.

Intellectual  Property

The Company relies  on  a combination of contractual  rights and copyright, trademark, patent and

trade  secret laws  to establish and  protect  its intellectual property. With respect to trademarks
specifically,  the  Company  has registrations in  many countries, including the United States, for its
material  trademarks, including  the  ‘‘Travelers’’ name and the  Company’s iconic umbrella logo. The
Company  has the  right to retain  its material  trademark  rights in perpetuity, so long as it  satisfies the
use  and registration requirements  of  all  applicable  countries.  The Company regards its trademarks as
highly valuable assets in  marketing  its  products and services and vigorously seeks to protect its
trademarks  against  infringement.  See  ‘‘Item 1A—Risk Factors—Intellectual property is  important  to
our business,  and  we may be  unable  to  protect and  enforce our own intellectual property or we may be
subject to  claims  for infringing the  intellectual property  of  others.’’

Company Website,  Social Media and  Availability of SEC Filings

The Company’s  Internet  website  is  www.travelers.com. Information on the Company’s website is not

incorporated  by reference herein and  is  not a part  of  this Form 10-K. The Company makes available
free of charge  on its website or provides a link  on  its website to the Company’s Annual Report on
Form  10-K,  Quarterly  Reports  on Form  10-Q  and Current Reports on Form 8-K,  and any amendments
to those  reports filed  or  furnished  pursuant to Section 13(a) or 15(d) of the Securities Exchange Act  of
1934,  as  soon as  reasonably  practicable  after those  reports are electronically filed with, or furnished to,
the  SEC.  To access these  filings,  go  to  the  Company’s website and under the ‘‘For Investors’’ heading,
click  on  ‘‘Financial Information’’  then  ‘‘SEC Filings.’’

The Company may  use its website and/or social  media outlets, such as Facebook and Twitter, as

distribution  channels  of  material  company  information. Financial  and other important information
regarding  the  Company is routinely  posted  on and  accessible through the Company’s website at
http://investor.travelers.com,  its  Facebook  page at https://www.facebook.com/travelers and its Twitter
account  (@Travelers)  at https://www.twitter.com/Travelers. In addition, you may automatically  receive
email  alerts  and other  information  about the  Company  when you enroll your email  address by visiting
the  ‘‘Email Notifications’’  section at http://investor.travelers.com.

Glossary of Selected Insurance Terms

Accident year . . . . . . . . . . . . . . The  annual calendar accounting period in which  loss  events

occurred, regardless of when the losses are actually reported,
booked or paid.

Adjusted unassigned surplus . . . Unassigned surplus as  of  the  most  recent  statutory  annual  report

reduced by twenty-five percent of  that  year’s unrealized
appreciation in value or revaluation of assets or unrealized profits
on  investments, as defined in that  report.

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Admitted insurer . . . . . . . . . . . A  company licensed to transact insurance business within  a  state.

Agent

. . . . . . . . . . . . . . . . . . . A  licensed individual who sells and services insurance policies,

receiving a commission from the insurer for  selling the business and
a  fee for servicing it. An independent  agent represents multiple
insurance companies and searches the market for the best product
for  its client.

Annuity . . . . . . . . . . . . . . . . . . A  contract that pays a periodic benefit over the remaining  life of a

person (the annuitant), the lives of two or more  persons or for  a
specified period of time.

Assigned risk  pools . . . . . . . . . . Reinsurance pools  which cover risks for those unable to  purchase

insurance in the voluntary market. Possible  reasons for this inability
include the risk being too great or the  profit  being  too small under
the required insurance rate structure. The costs of the risks
associated with these pools are charged back to insurance carriers
in  proportion to their direct writings.

Assumed  reinsurance . . . . . . . .

Insurance risks acquired from a ceding  company.

Book  value per  share . . . . . . . . Total common shareholders’ equity divided by the number of

common shares outstanding.

Broker . . . . . . . . . . . . . . . . . . . One  who negotiates contracts of insurance or reinsurance on behalf

of  an insured party, receiving a commission from the  insurer  or
reinsurer for placement and  other services rendered.

Capacity . . . . . . . . . . . . . . . . . . The  percentage of statutory capital and surplus,  or  the dollar

amount of exposure, that an  insurer  or  reinsurer  is  willing or able
to  place at risk. Capacity may apply  to  a single risk, a  program, a
line of business or an entire book of  business. Capacity  may be
constrained by legal restrictions, corporate restrictions or indirect
restrictions.

Captive . . . . . . . . . . . . . . . . . . A  closely-held insurance company whose primary purpose  is to

provide insurance coverage to the company’s  owners or their
affiliates.

Case reserves . . . . . . . . . . . . . . Claim department estimates of  anticipated  future  payments  to be

Casualty  insurance . . . . . . . . . .

made on each specific individual  reported  claim.

Insurance which is primarily concerned with  the losses caused by
injuries to third persons, i.e., not the insured, and the legal liability
imposed on the insured resulting  therefrom.  It includes, but is not
limited to, employers’ liability,  workers’  compensation,  public
liability, automobile liability, personal  liability and aviation liability
insurance. It excludes certain types of losses  that by law or custom
are considered as being exclusively within the scope  of  other types
of insurance, such as fire or marine.

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Catastrophe . . . . . . . . . . . . . . . A  severe loss caused by various natural events, including, among
others, hurricanes, tornadoes  and other windstorms, earthquakes,
hail,  wildfires, severe winter weather, floods, tsunamis,  volcanic
eruptions and other naturally-occurring events, such as solar flares.
Catastrophes can also be man-made,  such  as terrorist attacks and
other intentionally destructive acts including those involving  nuclear,
biological,  chemical,  radiological,  cyber-attacks,  explosions  and
infrastructure failures. Each catastrophe has  unique characteristics
and catastrophes are not predictable as to timing  or  amount. Their
effects are included in net and  operating income  and  claims and
claim adjustment expense reserves upon  occurrence.  A  catastrophe
may result in the payment of reinsurance reinstatement  premiums
and assessments from various pools.

Catastrophe  loss . . . . . . . . . . . . Loss and directly identified loss adjustment  expenses from

catastrophes.

Catastrophe  reinsurance . . . . . . A  form of excess-of-loss reinsurance which, subject  to a specified

limit, indemnifies the ceding company for the amount of loss in
excess of a specified retention with respect  to an accumulation of
losses and related reinsurance  reinstatement premiums resulting
from a catastrophic event. The actual reinsurance document is
called a ‘‘catastrophe cover.’’  These  reinsurance  contracts are
typically designed to cover property insurance  losses but can be
written to cover casualty insurance losses such as from workers’
compensation  policies.

Cede;  ceding company . . . . . . . When an insurer reinsures its liability with another insurer or a
‘‘cession,’’ it ‘‘cedes’’ business and  is referred to  as the  ‘‘ceding
company.’’

Ceded  reinsurance . . . . . . . . . .

Insurance risks transferred to another company as reinsurance.  See
‘‘Reinsurance.’’

Claim . . . . . . . . . . . . . . . . . . . . Request by an insured for indemnification  by an  insurance company

for  loss incurred from an  insured peril.

Claim adjustment  expenses . . . .

See ‘‘Loss adjustment expenses (LAE).’’

Claims  and claim adjustment

expenses . . . . . . . . . . . . . . . .

See ‘‘Loss’’ and ‘‘Loss adjustment expenses  (LAE).’’

Claims  and claim adjustment

expense  reserves . . . . . . . . . .

See ‘‘Loss reserves.’’

Cohort . . . . . . . . . . . . . . . . . . . A  group of items or  individuals that share a particular statistical  or

demographic characteristic. For example,  all claims for a given
product in a given market for a  given  accident year would represent
a cohort of claims.

35

Combined  ratio . . . . . . . . . . . . For Statutory Accounting Practices (SAP),  the combined ratio  is  the

sum  of the SAP loss and LAE  ratio and  the SAP underwriting
expense ratio as defined in the statutory  financial statements
required by insurance regulators. The  combined ratio as  used  in  this
report is the equivalent of, and is  calculated in the same manner  as,
the SAP combined ratio except that the SAP  underwriting expense
ratio  is based on net  written premium and the underwriting expense
ratio  as used in this report is  based on net earned premiums.

The  combined ratio is an indicator of the Company’s  underwriting
discipline, efficiency in acquiring and servicing its business  and
overall underwriting profitability. A combined ratio under  100%
generally indicates an underwriting profit. A combined ratio over
100% generally indicates an underwriting loss.

Other companies’ method of computing a similarly titled  measure
may not be comparable to the Company’s method of computing  this
ratio.

Combined ratio excluding

incremental impact of  direct
to consumer initiative . . . . . . The  combined ratio excluding  incremental impact  of  direct  to

consumer initiative is the combined ratio adjusted to exclude  the
direct, variable impact of the Company’s  direct-to-consumer
initiative in Personal Insurance.

Commercial  multi-peril  policies . Refers to policies  which cover both property and third-party liability

exposures.

Commutation  agreement . . . . . . An agreement between a reinsurer and a ceding company whereby

the reinsurer pays an agreed-upon amount in exchange for a
complete discharge of all obligations, including future obligations,
between the parties for reinsurance losses  incurred.

Debt-to-total capital  ratio . . . . . The  ratio of debt to total capitalization.

Debt-to-total capital  ratio

excluding  net  unrealized  gain
(loss)  on  investments . . . . . . . The  ratio of debt to total capitalization excluding the  after-tax

impact of net unrealized investment  gains and losses.

Deductible . . . . . . . . . . . . . . . . The  amount of loss that an insured retains.

Deferred  acquisition  costs

(DAC) . . . . . . . . . . . . . . . . .

Incremental direct costs of acquired  and renewal insurance
contracts, consisting of commissions (other than  contingent
commissions) and premium-related taxes that are deferred and
amortized to achieve a matching of  revenues  and expenses when
reported in financial statements prepared in accordance with U.S.
Generally Accepted Accounting Principles (GAAP).

36

Deficiency . . . . . . . . . . . . . . . . With regard to reserves for a given liability, a deficiency  exists when

Demand  surge . . . . . . . . . . . . .

it  is estimated or determined  that the reserves  are  insufficient  to
pay  the ultimate settlement value  of the related liabilities.  Where
the deficiency is the result of  an estimate, the estimated amount  of
deficiency (or even the finding of whether or not a deficiency  exists)
may change as new information becomes  available.

Significant short-term increases in building material and  labor costs
due  to a sharp increase in demand  for those  materials and  services,
commonly as a result of a large catastrophe  resulting in significant
widespread  property  damage.

Direct  written  premiums . . . . . . The  amounts charged by an insurer to insureds in  exchange  for

coverages provided in accordance with the  terms of  an  insurance
contract. The amounts exclude the impact  of  all reinsurance
premiums, either assumed or ceded.

Earned  premiums or  premiums

earned . . . . . . . . . . . . . . . . . That  portion of property casualty  premiums written that applies to

the expired portion of the policy term. Earned premiums are
recognized as revenues under both SAP and GAAP.

Excess and surplus  lines

insurance . . . . . . . . . . . . . . .

Insurance for risks not covered  by standard insurance due to the
unique nature of the risk. Risks  could  be placed in  excess and
surplus lines markets due to any number of characteristics, such as
loss  experience, unique or unusual exposures,  or  insufficient
experience in business. Excess and surplus lines are less  regulated
by  the states, allowing greater flexibility to design  specific  insurance
coverage and negotiate pricing  based on the risks to  be secured.

Excess liability . . . . . . . . . . . . . Additional casualty coverage  above a layer of  insurance exposures.

Excess-of-loss  reinsurance . . . . . Reinsurance that indemnifies the reinsured against all  or  a specified

portion of losses over a specified  dollar  amount or ‘‘retention.’’

Exposure . . . . . . . . . . . . . . . . . The  measure of risk used in the pricing  of  an insurance  product.
The  change in exposure is the amount  of  change in premium on
policies that renew attributable to the change in portfolio risk.

Facultative  reinsurance . . . . . . . The  reinsurance of all or  a portion of the insurance provided  by  a

single policy. Each policy reinsured is  separately negotiated.

Fair Access  to Insurance

Requirements  (FAIR)  Plan . . A residual  market  mechanism which  provides  property insurance  to

those unable to obtain such insurance through the  regular
(voluntary) market. FAIR plans are set  up on a  state-by-state  basis
to cover only those risks in that state.  For more information,  see
‘‘residual market (involuntary business).’’

Fidelity  and surety programs . . . Fidelity insurance coverage  protects an  insured for loss  due to

embezzlement or misappropriation  of funds by an employee.  Surety
is  a three-party agreement in which the insurer agrees to  pay  a
third party or make complete  an obligation in response to  the
default, acts or omissions  of an insured.

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Gross  written  premiums . . . . . . The  direct and assumed contractually determined amounts  charged

to  the policyholders for the effective period of the  contract  based
on  the terms and conditions of the insurance contract.

Ground-up  analysis . . . . . . . . . . A  method to estimate ultimate claim costs  for a given  cohort  of

claims such as an accident year/product  line  component. It  involves
analyzing the exposure and claim activity at an individual insured
level and then through the use of deterministic or  stochastic
scenarios and/or simulations, estimating the  ultimate  losses  for those
insureds. The total losses for the  cohort are then  the sum of the
losses for each individual insured.

In  practice, the method is sometimes simplified by performing  the
individual insured analysis only  for the larger  insureds,  with  the
costs for the smaller insureds estimated via sampling approaches
(extrapolated to the rest of the smaller insured  population) or
aggregate approaches (using assumptions consistent with  the
ground-up larger insured analysis).

Guaranteed cost products . . . . . An insurance policy  where the premiums charged will  not be
adjusted for actual loss experience during  the covered period.

Guaranty  fund . . . . . . . . . . . . . A  state-regulated mechanism that is financed by  assessing insurers

doing business in those states. Should insolvencies  occur, these
funds are available to meet some or  all of the  insolvent insurer’s
obligations to policyholders.

Holding  company  liquidity . . . . . Total cash, short-term invested assets and other  readily marketable

securities held by the holding company.

Incurred  but  not reported

(IBNR)  reserves . . . . . . . . . . Reserves for estimated losses and LAE that have been  incurred  but

not  yet reported  to the insurer. This  includes amounts for
unreported claims, development on  known cases, and  re-opened
claims.

Inland  marine . . . . . . . . . . . . . . A  broad type of insurance generally covering  articles that may  be
transported from one place to another, as  well  as bridges, tunnels
and other instrumentalities of  transportation.  It includes goods  in
transit, generally other than transoceanic,  and may include policies
for  movable objects such as personal effects, personal property,
jewelry, furs, fine art and others.

IRIS  ratios . . . . . . . . . . . . . . . . Financial ratios calculated by the NAIC  to assist state  insurance

departments in monitoring the financial condition  of  insurance
companies.

Large  deductible  policy . . . . . . . An insurance policy  where the customer assumes  at  least $25,000 or

more of each loss. Typically, the insurer is  responsible for paying
the entire loss under those policies and  then seeks reimbursement
from the insured for  the deductible amount.

Lloyd’s . . . . . . . . . . . . . . . . . . . An insurance marketplace based in London, England,  where

brokers, representing clients with insurable  risks,  deal  with Lloyd’s
underwriters, who represent investors. The investors  are  grouped
together into syndicates that provide  capital to insure the  risks.

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Loss . . . . . . . . . . . . . . . . . . . . . An occurrence that is the basis for submission  and/or payment of  a

claim. Losses may be covered, limited or excluded from coverage,
depending on the terms of the  policy.

Loss adjustment expenses

(LAE) . . . . . . . . . . . . . . . . . The  expenses of settling claims, including  legal  and  other fees and
the portion of general expenses allocated to claim settlement costs.

Loss and LAE  ratio . . . . . . . . . For  SAP, the loss and LAE ratio is the ratio of incurred losses  and

loss  adjustment expenses less certain administrative services  fee
income to net earned premiums as defined in the statutory financial
statements required by insurance regulators. The loss and LAE
ratio  as used in this report is calculated in  the same  manner as  the
SAP  ratio.

The  loss and LAE  ratio is an indicator  of the Company’s
underwriting discipline and underwriting  profitability.

Other companies’ method of computing a  similarly  titled  measure
may not be comparable to the  Company’s method of computing  this
ratio.

Loss reserves . . . . . . . . . . . . . . Liabilities established by insurers and reinsurers to reflect the

estimated cost of claims incurred that the  insurer or reinsurer will
ultimately be required to pay  in respect of insurance or reinsurance
it  has written. Reserves are established  for losses and for LAE,  and
consist of case reserves and IBNR reserves. As the  term is used in
this document, ‘‘loss reserves’’ is meant to  include reserves for  both
losses and LAE.

Loss reserve  development . . . . . The  increase or decrease in  incurred claims and  claim  adjustment

expenses as a result of the re-estimation of claims and  claim
adjustment expense reserves at successive valuation dates for  a
given group of claims. Loss reserve  development may be  related to
prior year or current year development.

Losses  incurred . . . . . . . . . . . . The  total losses sustained by  an insurance company under  a policy

or  policies, whether paid or unpaid. Incurred losses  include a
provision for IBNR.

National  Association  of

Insurance  Commissioners
(NAIC) . . . . . . . . . . . . . . . . An organization of the insurance commissioners or directors of all

50 states, the District of Columbia  and the  five  U.S. territories
organized to promote consistency of  regulatory practice and
statutory accounting standards  throughout the  United States.

Net  written  premiums . . . . . . . . Direct written premiums plus assumed reinsurance premiums less
premiums ceded to reinsurers.

New  business volume . . . . . . . . The  amount of written premium related to  new policyholders and

additional products sold to existing policyholders.

Operating  income  (loss) . . . . . . Net  income (loss) excluding the after-tax impact of net  realized

investment gains (losses), discontinued operations and  cumulative
effect of changes in accounting principles when  applicable.

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Operating  income  (loss)  per

share . . . . . . . . . . . . . . . . . . Operating income (loss) on a per share basis.

Operating  return  on equity . . . . The  ratio of operating income to average  equity  excluding  net

unrealized investment gains and losses  and discontinued operations,
net of tax.

Pool . . . . . . . . . . . . . . . . . . . . . An organization of insurers or reinsurers through which particular
types of risks are underwritten with premiums, losses and  expenses
being shared in agreed-upon percentages.

Premiums . . . . . . . . . . . . . . . . . The  amount charged during the year on policies and contracts

issued, renewed  or reinsured by an insurance company.

Probable maximum  loss  (PML) . The  maximum  amount of loss that  the Company would be expected

Property  insurance . . . . . . . . . .

to  incur on a policy if a loss were to occur,  giving effect to
collateral, reinsurance and other factors.

Insurance that provides coverage to a  person or business with an
insurable interest  in tangible property for  that person’s or business’s
property loss, damage or loss  of use.

Quota  share reinsurance . . . . . . Reinsurance wherein the insurer cedes  an  agreed-upon fixed
percentage of liabilities, premiums and  losses for each policy
covered on a pro rata basis.

Rates . . . . . . . . . . . . . . . . . . . . Amounts charged  per unit of insurance.

Redundancy . . . . . . . . . . . . . . . With regard to reserves for a given liability, a redundancy exists
when it is estimated or determined that the  reserves are greater
than  what will be needed to pay the  ultimate settlement  value of
the related liabilities. Where the redundancy  is  the result of an
estimate, the estimated amount of redundancy  (or even  the  finding
of  whether or not  a redundancy exists) may  change  as new
information  becomes  available.

Reinstatement  premiums . . . . . . Additional premiums payable to reinsurers  to restore coverage

limits that have been exhausted as a result of reinsured losses  under
certain excess-of-loss reinsurance  treaties.

Reinsurance . . . . . . . . . . . . . . . The  practice whereby one insurer, called the reinsurer, in
consideration of a  premium paid  to that insurer, agrees to
indemnify another insurer, called  the ceding company,  for  part  or
all  of the liability of the ceding company under one or more
policies or contracts of insurance which it  has issued.

Reinsurance  agreement . . . . . . . A contract specifying the terms of a reinsurance  transaction.

Renewal premium  change . . . . . The estimated change in average premium on policies that renew,
including rate and exposure changes. Such statistics are subject  to
change based on a number of factors, including changes  in
estimates.

Renewal rate change . . . . . . . . . The estimated change in average premium on policies that renew,

excluding exposure changes. Such statistics are subject  to change
based on a number of factors, including changes  in estimates.

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Residual market  (involuntary

business) . . . . . . . . . . . . . . . .

Insurance market which provides  coverage for  risks for those  unable
to  purchase insurance in the voluntary market. Possible reasons for
this inability include the risks being too  great or the  profit  potential
too small under the required insurance rate structure. Residual
markets are frequently created by state legislation either because  of
lack  of available coverage such as: property coverage in  a
windstorm prone area or protection of the accident victim as  in the
case of workers’ compensation. The costs of the  residual  market  are
usually charged back to the direct insurance  carriers  in proportion
to  the carriers’ voluntary market  shares for  the type of coverage
involved.

Retention . . . . . . . . . . . . . . . . . The  amount of exposure a policyholder  company retains on any  one

risk  or group of risks.  The term  may apply to an insurance  policy,
where the policyholder is an individual, family or business, or a
reinsurance policy, where the policyholder  is  an  insurance company.

Retention rate . . . . . . . . . . . . . The percentage of prior period  premiums (excluding  renewal

premium changes), accounts or policies  available for  renewal  in  the
current period that were renewed.  Such statistics are subject  to
change based on a number of  factors,  including  changes in
estimates.

Retrospective premiums . . . . . . Premiums related to retrospectively rated policies.

Retrospective rating . . . . . . . . . A  plan or method which permits adjustment of the final  premium

or  commission on the basis of actual loss experience, subject to
certain minimum and maximum  limits.

Return on  equity . . . . . . . . . . . The  ratio of net income (loss) less preferred dividends to average

shareholders’  equity.

Risk-based capital (RBC) . . . . . A  measure adopted by the NAIC and enacted by  states  for

determining the minimum statutory policyholders’  surplus
requirements of insurers. Insurers having total adjusted capital  less
than  that required by the RBC calculation will  be subject  to varying
degrees of regulatory action depending  on the  level of capital
inadequacy.

Risk retention  group . . . . . . . . . An alternative form of insurance in which  members  of  a similar

profession or business band together to self insure their risks.

Runoff  business . . . . . . . . . . . . An operation which has been determined  to be  nonstrategic;

includes non-renewals of in-force policies and  a cessation of writing
new business, where allowed by law.

Salvage . . . . . . . . . . . . . . . . . . The  amount of money an insurer recovers  through the  sale of

property transferred to the insurer  as a  result  of a  loss payment.

S-curve  method . . . . . . . . . . . . A  mathematical function which depicts an initial slow change,

followed by a rapid change and then ending in  a slow change  again.
This  results in an ‘‘S’’ shaped line when depicted graphically. The
actuarial application of these curves fit  the reported data to date
for  a particular cohort of claims to an S-curve  to project future
activity for that cohort.

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Second-injury  fund . . . . . . . . . . The  employer of an injured, impaired worker  is  responsible only  for

the workers’ compensation benefit for the most recent injury; the
second-injury fund would cover the cost of  any additional benefits
for  aggravation of a prior condition.  The cost is shared  by the
insurance industry and self-insureds,  funded through assessments  to
insurance companies and self-insureds based  on  either premiums or
losses.

Self-insured  retentions . . . . . . . That portion of the risk retained by a  person  for its own  account.

Servicing  carrier . . . . . . . . . . . . An insurance company  that provides, for a fee, various services

including policy issuance, claims adjusting and  customer service for
insureds in a reinsurance pool.

Statutory  accounting  practices

(SAP) . . . . . . . . . . . . . . . . . . The  practices and procedures prescribed or permitted  by domiciliary

state  insurance regulatory authorities in the  United  States for
recording transactions and preparing  financial  statements. SAP
generally reflect a modified  going concern basis of accounting.

Statutory  capital  and  surplus . . . The  excess  of  an insurance  company’s  admitted  assets over  its

liabilities, including loss reserves, as determined in accordance  with
SAP.  Admitted assets are assets of  an insurer prescribed or
permitted by a state to be recognized on the statutory balance
sheet. Statutory  capital and surplus  is also referred to as  ‘‘statutory
surplus’’ or ‘‘policyholders’ surplus.’’

Statutory  net  income . . . . . . . . . As determined under SAP, total revenues less  total  expenses and

income  taxes.

Structured  settlements . . . . . . . . Periodic payments to an injured person or survivor for a determined

number of years or for life, typically  in settlement of  a claim under
a  liability policy, usually funded through the purchase of an annuity.

Subrogation . . . . . . . . . . . . . . . A  principle of law incorporated  in insurance policies, which enables

an insurance company, after paying a  claim under  a policy, to
recover the amount of the loss from  another person or entity who  is
legally liable for it.

Tenure  impact

. . . . . . . . . . . . . As new business volume increases and  accounts for a greater

percentage of earned premiums, the loss and  LAE  ratio generally
worsens initially, as the loss and LAE  ratio for  new business  is
generally higher than the ratio for business that has  been  retained
for longer periods. As poorer  performing business leaves  and
pricing segmentation improves on renewal  of  the business  that  is
retained, the loss and LAE ratio is expected to improve in  future
years.

Third-party  liability . . . . . . . . . . A  liability owed to a claimant (third  party)  who is not one  of  the
two  parties to the insurance contract. Insured  liability  claims are
referred to as third-party claims.

Total  capitalization . . . . . . . . . . The  sum of total shareholders’ equity and debt.

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Treaty reinsurance . . . . . . . . . . The  reinsurance of a specified type or category  of  risks defined  in a

reinsurance agreement (a ‘‘treaty’’) between a primary insurer  or
other reinsured and a reinsurer. Typically, in treaty  reinsurance,  the
primary insurer or reinsured is obligated to offer  and the reinsurer
is  obligated to accept a specified portion of all that type or category
of  risks originally written by the primary  insurer or reinsured.

Umbrella  coverage . . . . . . . . . . A  form of insurance protection against losses in excess  of  amounts
covered by other liability insurance policies or amounts  not covered
by  the usual liability policies.

Unassigned  surplus . . . . . . . . . . The  undistributed and unappropriated amount of statutory capital

and surplus.

Underlying  combined  ratio . . . . The  underlying combined ratio  is the sum  of  the underlying loss

and LAE ratio and the underlying  underwriting  expense ratio.  The
underlying combined ratio is an indicator  of the Company’s
underwriting discipline and underwriting profitability  for the current
accident  year.

Underlying loss  and  LAE  ratio . The  underlying loss and LAE ratio  is  the loss  and  LAE ratio,
adjusted to exclude the impact of catastrophes and prior year
reserve development. The underlying  loss and LAE  ratio is an
indicator of the Company’s underwriting  discipline  and underwriting
profitability for the current accident year.

Underlying  underwriting

expense  ratio . . . . . . . . . . . . . The  underlying underwriting expense  ratio is the underwriting
expense ratio adjusted to exclude  the impact  of  catastrophes.

Underlying underwriting margin

Net  earned premiums and fee income  less claims and claim
adjustment expenses (excluding catastrophe  losses  and prior  year
reserve development) and insurance-related expenses.

Underwriter . . . . . . . . . . . . . . . An employee of an insurance company who examines, accepts or

rejects risks and classifies accepted risks  in order to  charge an
appropriate premium for each accepted  risk. The  underwriter is
expected to select business  that will produce an  average risk of  loss
no  greater than that anticipated for the  class  of  business.

Underwriting . . . . . . . . . . . . . . The  insurer’s or reinsurer’s process  of  reviewing applications for

insurance coverage, and the decision as to whether  to accept all or
part  of the coverage and determination of the applicable premiums;
also refers to the acceptance of that coverage.

Underwriting  expense  ratio . . . . For  SAP, the underwriting expense ratio is the  ratio of underwriting

expenses incurred (including commissions paid),  less certain
administrative services fee income and billing  and policy fees, to  net
written premiums as defined in the statutory  financial  statements
required by insurance regulators. The underwriting expense  ratio as
used  in this report is the ratio of underwriting  expenses (including
the amortization of deferred acquisition costs), less certain
administrative services fee income, billing  and policy fees and other,
to net earned premiums.

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The  underwriting expense ratio is an  indicator of the Company’s
efficiency in acquiring and servicing its  business.

Other companies’ method of computing a similarly titled measure
may not be comparable to the Company’s  method of  computing  this
ratio.

Underwriting gain  or  loss . . . . . Net  earned premiums and fee income less claims and  claim

adjustment expenses  and insurance-related expenses.

Unearned  premium . . . . . . . . . . The  portion of premiums written  that  is  allocable  to  the unexpired

portion of the policy term.

Voluntary market . . . . . . . . . . . The  market in which a person seeking insurance obtains coverage

without the assistance of residual market mechanisms.

Wholesale  broker . . . . . . . . . . . An independent or exclusive agent that represents  both admitted

and non-admitted insurers in market areas, which include standard,
non-standard, specialty and excess and surplus lines  of  insurance.
The  wholesaler does not deal directly  with the insurance consumer.
The  wholesaler deals with the retail agent or broker.

Workers’ compensation . . . . . . . A  system (established under  state and  federal laws) under which

employers provide insurance for benefit payments to their
employees for work-related injuries, deaths and  diseases, regardless
of  fault.

Item 1A. RISK FACTORS

You should  carefully  consider the following risks and all  of  the other information set forth in  this

report,  including without limitation  our  consolidated financial statements and the notes thereto  and
‘‘Item 7—Management’s  Discussion and  Analysis  of  Financial Condition and  Results of  Operations—
Critical  Accounting  Estimates.’’

Catastrophe losses could  materially and adversely  affect  our results of operations, our financial
position and/or liquidity,  and  could adversely impact our ratings, our ability  to raise capital and the
availability and cost of reinsurance. Our property and casualty insurance operations  expose  us  to
claims  arising  out of catastrophes. Catastrophes can be caused by various natural events, including,
among  others, hurricanes,  tornadoes  and  other windstorms, earthquakes, hail, wildfires, severe winter
weather, floods,  tsunamis, volcanic  eruptions and other naturally-occurring events, such as solar flares.
Catastrophes can  also be  man-made,  such  as terrorist attacks and other intentionally destructive acts
including those  involving  nuclear,  biological, chemical or radiological events, cyber-attacks, explosions
and  infrastructure  failures.  The  geographic  distribution of our business subjects us to  catastrophe
exposures in  the United  States  and Canada,  which  include, but  are not  limited to: hurricanes from
Maine  through Texas; tornadoes and  hail storms throughout the Central, Mid-Atlantic and Southeastern
regions  of the  United States; earthquakes in California, the New Madrid region  and the Pacific
Northwest  region  of North America; wildfires, particularly in western states and Canada; and  terrorism
in major cities  in the  United States.  In  addition to our  operations in the United States and Canada, our
international  operations subject us to catastrophe  exposures in the United  Kingdom, the Republic of
Ireland and Brazil  as  well  as  to  a variety of world-wide  catastrophe exposures through our Lloyd’s
operations.

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The incidence and  severity of  catastrophes  are  inherently  unpredictable,  and it is possible that  both
the  frequency  and  severity  of natural  and man-made catastrophic events could  increase. Severe weather
events over the  last  two decades  have  underscored  the unpredictability of future  climate  trends, and
potentially  changing  climate conditions  could add  to the frequency and severity of  natural disasters  and
create additional uncertainty  as  to future trends and  exposures.  For example, over the last two decades,
hurricane activity  has impacted areas  further inland than  previously experienced by us, and
demographic  changes have resulted in  larger  populations in coastal areas  which historically have  been
subject to  severe  storms and related  storm surge, thus expanding our potential for losses from
hurricanes. Additionally, both  the frequency  and  severity of tornado  and hail storms in the United
States have been  more volatile  during  the last decade.  Moreover, we  could experience more than one
severe catastrophic  event in  any given  period.

All  of  the catastrophe modeling tools  that  we use, or that we rely on from outside parties, to
evaluate  certain of  our  catastrophe exposures are based on assumptions and judgments that are subject
to error  and mis-estimation and may  produce estimates that are materially different than actual results.
In  addition,  compared  to models for  hurricanes, models for earthquakes are less  reliable due  to there
being a more  limited number  of significant  historical  events  to analyze, while models  for tornadoes  and
hail  storms  are newer  and  may be  even  less reliable due  to the highly random geographic nature and
size of these  events.  As a  result,  models  for earthquakes and tornado  and hail storms may have even
greater difficulty  predicting  risks  and  estimating losses.  Further, changes in  climate  conditions could
cause our  underlying  modeling  data to  be  less predictive, thus limiting our ability to effectively  evaluate
and  manage  catastrophe risk.  As compared  to natural catastrophes, modeling for man-made
catastrophes,  such  as  terrorism, is even  more difficult and  less reliable, and  for some events, currently
there  are no  reliable  modeling techniques.  See ‘‘We may be adversely  affected if our pricing and capital
models provide materially different indications than  actual  results’’ below as well as ‘‘Item 7—
Management’s Discussion  and Analysis  of  Financial Condition and  Results of Operations—Catastrophe
Modeling’’ and ‘‘—Changing  Climate  Conditions.’’

The extent of  losses  from a  catastrophe is a  function  of  the total  amount of insured exposure in

the  area  affected  by  the event,  the  severity of the event and the coverage provided, which can be  both
property and  casualty  coverages.  Increases  in the value and  geographic concentration of insured
property,  the  number  of policyholders  exposed to certain events and the effects of inflation could
increase the severity of  claims  from  catastrophic events in the future. For  example, the specific
geographic location impacted  by  tornadoes  is  inherently random and unpredictable  and the specific
location  impacted  by a  tornado  may  or  may  not be  highly populated and may  or may not have a  high
concentration  of  our  insured  exposures.

States have from time  to time  passed legislation, and regulators have taken action,  that have the

effect of  limiting  the ability of  insurers  to  manage catastrophe risk, such as legislation prohibiting
insurers from  reducing exposures or  withdrawing from catastrophe-prone areas or mandating that
insurers participate  in  residual  markets. Participation in  residual market mechanisms has resulted in,
and  may  continue  to  result in, significant losses  or  assessments to insurers, including us, and, in certain
states, those losses or assessments may  not  be commensurate with our direct catastrophe exposure  in
those  states. If  our  competitors leave  those  states  having residual market mechanisms,  remaining
insurers,  including  us,  may be subject  to significant increases  in losses or assessments following a
catastrophe. In  addition,  following  catastrophes, there  are sometimes  legislative  and administrative
initiatives and court decisions that seek to expand insurance coverage for catastrophe claims beyond the
original intent of the  policies  or seek  to prevent  the application of deductibles. Also,  our  ability to
adjust  terms, including deductible  levels, or to increase  pricing to the extent necessary to offset rising
costs of catastrophes, particularly  in the Personal Insurance segment, requires approval of regulatory
authorities  of  certain states. Our ability  or our willingness to manage our  catastrophe exposure by
raising  prices, modifying  underwriting  terms  or  reducing exposure to certain geographies may be limited

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due to considerations of  public  policy,  the evolving political environment and/or changes in the  general
economic climate. We  also  may  choose  to write business in catastrophe-prone areas  that we  might  not
otherwise write  for  strategic purposes,  such as improving our  access  to other underwriting
opportunities.

There are  also factors that  impact  the estimation  of  ultimate  costs for catastrophes. For example,

the  estimation  of  claims and claim  adjustment  expense  reserves related  to hurricanes  can be affected by
the  inability 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  claims  and  claim adjustment  expense 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;  business  interruption costs; late reported claims;
litigation; and  reinsurance  collectability.  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 claims and
claim adjustment expense reserves  for  that reporting period. The estimates related to catastrophes are
adjusted in subsequent  periods  as  actual  claims emerge and additional information becomes  available.

Exposure to catastrophe losses or actual losses resulting  from a catastrophe could adversely affect

our financial  strength  and  claims-paying  ratings and  could impair our  ability to raise capital on
acceptable terms  or  at all.  Also, as a  result of our  exposure to  catastrophe losses or  actual losses
following a catastrophe,  rating  agencies  may further increase capital requirements, which may  require
us  to raise capital  to maintain  our  ratings.  A  ratings downgrade could hurt our  ability to compete
effectively  or  attract  new business. In  addition,  catastrophic events could  cause us to exhaust our
available reinsurance  limits and could  adversely  impact the cost and availability of reinsurance. Such
events can also impact  the  credit  of our  reinsurers.  For  a discussion of our catastrophe reinsurance
coverage,  see  ‘‘Item  1—Business—Reinsurance—Catastrophe Reinsurance.’’ Catastrophic events could
also  adversely impact  the  credit  of  the  issuers of securities, such  as states or municipalities, in which  we
have  invested.

In  addition,  coverage  in  our  reinsurance  program for terrorism is limited. Although the Terrorism

Risk Insurance Program provides  benefits in the  event  of certain acts of terrorism, those benefits are
subject to  a  deductible and other limitations and the program is scheduled to expire on  December  31,
2020.  Under current  provisions of  this  program, once  our losses exceed 20% of  our commercial
property and  casualty  insurance  premium for  the preceding calendar year, the federal government will
reimburse us for  83% of our losses  attributable to  certain  acts of terrorism which exceed this deductible
up  to a total  industry  program  cap  of  $100 billion. Our estimated deductible under the program is
$2.45  billion  for 2017.  Over  the  remaining four-year life  of the reauthorized program, the federal
government  reimbursement  percentage  will fall from 83%  to 80%. In addition, because the
interpretation of  this  law is  untested,  there is substantial uncertainty as to how it will be applied to
specific  circumstances.  For example, application  of  the law to a specific event will  depend upon  whether
the  government  has  designated such  event as  a  covered  event. It is also possible that future  legislation
could change or  eliminate the  program,  which could adversely affect our business by  increasing our
exposure to  terrorism  losses,  or by lowering  our business volume  through efforts to avoid that exposure.
For  a  further description of  the Terrorism Risk Insurance Program, see note 5 of notes to the
consolidated  financial  statements.

Because  of the  risks  set forth above, catastrophes such as those caused by various  natural or
man-made events,  such  as  a terrorist  attack  or  other  intentionally destructive acts, including those
involving  nuclear, biological,  chemical  or  radiological events or cyber-attacks, could materially and
adversely  affect  our  results  of operations,  financial position and/or  liquidity. Further,  we may not  have
sufficient resources  to respond  to  claims  arising  from  a high frequency  of high severity natural
catastrophes and/or of man-made catastrophic events involving conventional means.  In  addition,  while

46

we seek to  manage  our  exposure  to man-made  catastrophic events involving conventional  means, we
may not have  sufficient resources to  respond  to  claims arising out of one or more man-made
catastrophic events involving ‘‘unconventional’’ means,  such as nuclear, biological, chemical or
radiological  events.

If  actual claims exceed  our  claims and claim adjustment expense  reserves, or if changes in the
estimated level  of  claims  and  claim adjustment expense reserves are necessary, including as a result  of,
among other  things, changes  in  the legal, regulatory and economic environments in which  the
Company operates, our financial  results  could be  materially and adversely affected. Claims and claim
adjustment  expense  reserves  do not represent an exact calculation of liability, but instead represent
management  estimates of what  the ultimate  settlement and administration of claims will cost, generally
utilizing actuarial  expertise and  projection techniques, at a given accounting date.

The process of estimating  claims  and  claim  adjustment expense reserves involves a high degree of
judgment and  is  subject  to a  number  of  variables. These variables  can be affected by both internal  and
external  events, such as: changes in  claims handling  procedures; adverse changes in loss cost trends,
including inflationary  pressures and  technology changes  which may impact medical, auto and  home
repair  costs;  economic conditions including  general  and wage inflation; legal  trends and legislative
changes;  and  varying judgments  and  viewpoints  of  the individuals involved in the estimation process,
among  others. The impact of many  of  these  items on ultimate costs for claims and claim adjustment
expenses is  difficult  to estimate. Claims  and  claim  adjustment expense reserve estimation difficulties
also  differ  significantly by product  line  due to  differences in claim complexity,  the volume of claims, the
potential severity of  individual  claims,  the  determination of occurrence date for a claim and reporting
lags  (the  time between  the  occurrence  of the  policyholder event and when  it is actually reported  to the
insurer).

It  is  possible  that, among other things, past or future steps  taken by the  federal government to
stimulate the  U.S. economy, including  tax  reform  and changes in international trade regulation, such  as
the  potential  for  a  destination-based,  border-adjustable consumption tax system and/or tariffs, could
lead to  higher inflation  than  we had  anticipated, which could in  turn lead to an increase in  our  loss
costs.  The  impact  of  inflation  on  loss  costs could be more pronounced for those  lines of business that
are considered  ‘‘long  tail,’’  such as general liability, as they require a relatively long period of time  to
finalize and  settle  claims  for a given  accident year. In  addition, a significant portion  of claims costs,
including those  in ‘‘long tail’’  lines  of  business, consists of medical costs. Changes in healthcare
legislation could significantly  impact  the  availability, cost  and allocation of payments  for medical
services,  and it  is  possible  that,  as  a  result, inflationary  pressures in medical  costs may increase or claim
frequency and/or  severity  may otherwise  be adversely impacted. The estimation of claims and claim
adjustment  expense  reserves  may  also  be  more difficult  during  times of  adverse or uncertain economic
conditions due  to unexpected  changes  in behavior of claimants and policyholders, including an increase
in fraudulent reporting  of  exposures  and/or  losses, reduced maintenance of insured properties,
increased  frequency  of  small claims  or delays  in the  reporting of claims. In addition, the estimation of
claims  and claim adjustment expense reserves may be  influenced by other  external factors, including
continued  intensive  advertising  by  plaintiff  attorneys.

We continually  refine our claims and  claim  adjustment  expense reserve estimates in a regular,
ongoing process as historical  loss experience develops, additional claims are reported and settled,  and
the  legal, regulatory  and economic  environment evolves. Business  judgment is applied throughout the
process,  including  the  application  of  various individual experiences and expertise to multiple sets of
data  and  analyses.  Different  experts may choose  different assumptions when  faced with material
uncertainty, based on  their  individual  backgrounds, professional experiences and areas of focus. Hence,
such experts  may  at  times produce estimates materially different from  each other. This risk may be
exacerbated in the  context  of  an acquisition.  Experts  providing input to the various estimates and
underlying assumptions  include  actuaries, underwriters, claim personnel and lawyers, as well as other

47

members  of  management.  Therefore,  management may have to consider varying  individual viewpoints
as part  of its  estimation  of  claims  and  claim adjustment expense reserves.

We attempt  to consider all  significant facts  and circumstances known at the time claims and claim

adjustment  expense  reserves  are  established or reviewed.  Due to the inherent uncertainty underlying
claims  and claim adjustment expense  reserve  estimates,  the  final resolution of  the estimated liability  for
claims  and claim adjustment expenses  will likely  be higher or lower than  the related  claims and claim
adjustment  expense  reserves  at the reporting date. Therefore,  actual paid losses in the future may yield
a  materially different  amount  than is  currently reserved.

Because  of the  uncertainties  set  forth above, additional  liabilities resulting  from one  insured event,

or an accumulation of  insured events,  may exceed the current related reserves. In addition, our
estimate  of  claims and  claim  adjustment  expenses may change. These additional liabilities  or increases
in estimates, or  a range  of  either, could  vary significantly from period to period, cannot now  be
reasonably estimated and  could  materially and  adversely affect our  results of  operations  and/or our
financial  position.

For  a  discussion of  claims  and claim adjustment  expense  reserves by product line, including
examples of  common factors  that  can  affect  required  reserves, see  ‘‘Item 7—Management’s  Discussion
and  Analysis of  Financial Condition  and  Results of Operations—Critical Accounting  Estimates—Claims
and  Claim Adjustment  Expense  Reserves.’’

During  or following  a  period of  financial market disruption or an economic downturn, our

business  could  be  materially and  adversely affected. Worldwide financial markets and economic
conditions have,  from  time  to  time,  experienced significant disruption  or deterioration  and  likely will
experience  periods  of  disruption  or deterioration in  the future.  If  financial  markets experience
significant disruption  or if  economic  conditions deteriorate,  our results of operations, financial  position
and/or  liquidity likely  would  be  adversely impacted.  For example, financial  market  disruptions  and
economic downturns have resulted  in,  among other things, reduced  business volume,  as well as
heightened  credit  risk  and reduced valuations  for certain of  our investments. An inflationary
environment,  as a  result of  government  efforts to stabilize  the  economy  after a  disruption  or otherwise,
may also,  as  we discuss in risk  factors  above, adversely  impact our loss  costs and  the  valuation of our
investment  portfolio.

Financial  market  disruption or  an economic  downturn could be  exacerbated  by  actual  or  potential
economic and  geopolitical instability  in  many regions of the  world.  This  can impact our  business  even  if
we do  not  conduct  business  in  the  region  subject to the instability.  For example,  due to globalization,
instability  in  one region can  spread  to  other  regions where  we  do  business. In  Europe,  uncertainty  in
recent years  has included the increased  potential for default by  one  or  more  European  sovereign debt
issuers,  the  potential partial or complete dissolution of the  Eurozone  and  its common currency  and  the
negative impact of  such potential  events  on  global financial  institutions and  capital  markets generally.
Actions  or  inactions  of European  governments,  including  the United Kingdom’s expected withdrawal
from  the  European  Union, may impact these  actual  or  perceived  risks. In  the  United States, future
actions  or  inactions of  the United  States government may  also impact  economic  conditions.  For
example, the new  U.S.  administration  may address issues related  to the  U.S.  Federal budget  and  taxes,
the  national  debt,  international trade,  the Affordable Care  Act and  regulation  generally differently  than
the  prior U.S.  administration,  all  of which  may contribute,  positively  or  negatively,  to  economic
conditions generally  and create economic  uncertainty.

Several  of the  risk factors discussed  above  and below  identify risks  that  could  result from, or be
exacerbated by,  financial market disruption, an economic  slowdown  or  economic  uncertainty. These
include  risks  discussed above related  to our estimates of claims and claim  adjustment expense reserves,
and  those discussed  below related  to  our investment portfolio,  the competitive  environment, emerging
claim and  coverage  issues, reinsurance  arrangements, other  credit  exposures, regulatory developments

48

and  the  impact  of rating  agency actions.  You  should also refer to ‘‘Item 7—Management’s Discussion
and  Analysis of  Financial Condition  and  Results of Operations,’’ particularly the ‘‘Outlook’’ section,  for
additional  information about  these  risks  and the  potential impact  on our business.

Our investment  portfolio is  subject  to  credit and  interest rate risk, and may suffer reduced

Investment returns are an important  part of our
returns or material  realized or  unrealized  losses.
overall profitability.  Fixed  maturity  and  short-term  investments comprised approximately 93% of the
carrying value  of  our  investment  portfolio  as of December  31, 2016. Changes in interest rates caused by
inflation or other  factors  (inclusive of  credit spreads) affect the carrying value of our fixed maturity
investments and  returns on  our fixed  maturity and  short-term investments. A decline in interest rates
reduces  the returns available  on  short-term investments  and new fixed  maturity investments (including
those  purchased  to re-invest  maturities  from the existing portfolio), thereby negatively  impacting our
net  investment  income, while  rising  interest  rates reduce the  market value of existing fixed maturity
investments, thereby negatively  impacting  our book  value. During 2016, the net pre-tax unrealized  gain
in our fixed  income  portfolio decreased  from $1.78 billion to  $865  million as interest rates increased.
Any future  increases in  interest  rates  (inclusive of credit spreads) would result  in a further decline  in
that  unrealized  gain position  or in  an  unrealized  loss, thereby  adversely impacting our book value.
Interest  rates in  recent  years have  been  and  remain at very low levels relative to historical  experience,
and  it is  possible  that  rates  may  remain  at low levels for a  prolonged period. The value of our fixed
maturity and  short-term  investments is  also subject  to  the risk that certain  investments may default or
become impaired  due to  a  deterioration  in the  financial  condition of one or more issuers of  the
securities held  in  our portfolio,  or due  to a  deterioration in the financial condition of an insurer that
guarantees an  issuer’s  payments  of such  investments. Such defaults and impairments  could reduce our
net  investment  income  and result  in realized  investment losses. During an economic downturn, fixed
maturity and  short-term  investments could be  subject to a higher risk of default. Rapid changes in
commodity prices, such as a significant  decline  in oil  prices, could also subject certain of our
investments to a  higher risk of default.

Our fixed maturity  investment portfolio  is  invested, in  substantial part, in obligations of states,

municipalities  and political  subdivisions  (collectively  referred  to as the municipal bond portfolio).
Notwithstanding the  relatively  low  historical rates of default on many of these obligations and
notwithstanding  that we typically  seek  to  invest in high-credit-quality securities (including  those  with
structural protections such  as being  secured  by dedicated or pledged sources of revenue), our municipal
bond portfolio could  be  subject  to  default or impairment.  In  particular:

• In  recent  years, many state and  local governments  have been operating under deficits or

projected  deficits.  The  severity  and duration of these deficits  could  have  an adverse  impact  on
the  collectability and  valuation of our municipal  bond  portfolio.  These  deficits may  be
exacerbated by the  impact  of unfunded pension  plan obligations and  other  postretirement
obligations or  by declining  municipal  tax bases and revenues  in times  of  financial stress.

• Some  issuers may be  unwilling to increase  tax rates,  or to reduce spending, to fund interest  or
principal payments on their municipal bonds, or may be unable  to  access  the municipal  bond
market to fund  such  payments.  The risk  of widespread  defaults  may  increase  if some issuers
voluntarily choose  to default, instead of implementing difficult  fiscal measures,  and  the actual or
perceived consequences  (such  as  reduced  access to capital markets) are less severe than
expected.

• The risk of  widespread defaults may also increase if there are changes  in legislation that  permit
states, municipalities and  political subdivisions to file  for bankruptcy protection  where  they were
not permitted  before.  In addition, the collectability  and  valuation of municipal  bonds  may be
adversely affected  if  there  are  judicial interpretations in a  bankruptcy  or  other  proceeding  that
lessen the  value of  structural protections.  For  example, debtors may  challenge  the  effectiveness

49

of  structural protections  thought  to be  provided by  municipal securities  backed by  a dedicated
source  of revenue.  The  collectability and valuation may  also be  adversely  affected if  there are
judicial  interpretations in  a  bankruptcy or other proceeding  that  question  the payment priority of
municipal  bonds.

Approximately  30% of the  fixed maturity portfolio  is  expected to mature over the next three years

(this includes  the  early  redemption  of  bonds,  assuming interest rates (including credit spreads) do not
rise significantly  by  applicable  call dates). For a schedule of the  contractual maturities of our fixed
maturity portfolio  by year  for the next  several years, see ‘‘Item 7—Management’s Discussion and
Analysis  of  Financial Condition  and  Results of Operations—Investment Portfolio.’’ Of that maturing
portfolio, a substantial  amount  includes  municipal  bonds that have been pre-refunded with U.S.
treasury securities. As  a  result, even  if  our  investment strategy does not significantly change over the
next  few years, the  overall yield on  and  composition of our portfolio could be meaningfully impacted by
the  types  of investments  available  for  reinvestment with the proceeds of matured bonds. For example,  if
yields  remain low when  we reinvest  such proceeds, our future net investment income would  be
adversely  affected.  In addition, depending on  the specific bonds available for purchase at the time  of
re-investment, the mix  of  specific issuers in  our fixed-income and municipal bond portfolio will change.

Our portfolio has benefited from tax exemptions (such as those related  to interest from municipal

bonds)  and  certain  other  tax laws, including, but not limited to, those governing dividends-received
deductions and tax  credits  (such as foreign  tax credits). Changes in these laws  could  adversely impact
the  value  of our investment portfolio.  See ‘‘Changes in U.S. tax laws or in the tax laws of other
jurisdictions in  which we  operate  could  adversely impact us’’  below.

Our  investment  portfolio  includes:  residential  mortgage-backed  securities;  collateralized  mortgage
obligations; pass-through securities and  asset-backed securities collateralized by sub-prime mortgages;
commercial mortgage-backed securities;  and wholly-owned real estate and real estate partnerships, all
of  which  could  be  adversely impacted  by declines in  real  estate valuations and/or financial market
disruption.

We also invest  a  portion of  our  assets in equity securities, private  equity  limited partnerships,
hedge  funds  and  real estate  partnerships.  From time  to  time, we may also invest in other types of
non-fixed maturity  investments,  including investments with exposure to commodity price risk, such as
oil. All of  these asset  classes  are subject  to greater  volatility in their  investment returns  than  fixed
maturity investments. General economic conditions, changes in  applicable tax  laws and many  other
factors  beyond  our  control can  adversely affect  the value of our non-fixed maturity investments and  the
realization  of  net investment income,  and/or result in  realized investment losses. As a result  of these
factors,  we may realize reduced returns  on these investments, incur losses on sales of these investments
and  be required to write  down the value of these investments,  which could reduce our net investment
income  and result  in realized  investment losses. From time to time, the Company enters into short
positions in U.S.  Treasury futures  contracts  to manage the duration of its fixed maturity portfolio,
which can result  in realized investment  losses.

Our investment portfolio  is also  subject to increased valuation uncertainties when investment
markets are  illiquid.  The  valuation  of investments is more subjective when markets are illiquid, thereby
increasing  the risk that  the estimated fair value (i.e.,  the carrying amount)  of the portion of the
investment portfolio that  is  carried  at fair value as reflected in our  financial statements is not reflective
of  prices at which  actual  transactions  could  occur.

Given  that  economic and  market conditions have  been  and  could be  highly uncertain,  we may,

depending on circumstances  in the  future, make changes to the  mix  of investments in our investment
portfolio. These changes may impact  the duration, volatility and risk of our investment portfolio.

50

Because  of the  risks  set forth above, the value  of  our investment portfolio  could decrease, we
could experience reduced net  investment  income and  we could experience realized and/or unrealized
investment losses,  which  could materially and  adversely  affect our results of operations, financial
position and/or liquidity.

Our business could  be harmed  because of our  potential  exposure to asbestos and  environmental

claims and related litigation. With  regard to asbestos claims, we have received and continue  to
receive a significant number  of asbestos  claims from policyholders  (including others seeking coverage
under  a  policy).  Factors  underlying  these claim filings  include  continued intensive advertising  by lawyers
seeking asbestos  claimants  and  the  continued  focus by plaintiffs on defendants  who were not
traditionally  primary  targets  of  asbestos  litigation. The focus on these defendants is primarily the result
of  the number  of  traditional  asbestos  defendants  who have sought bankruptcy protection in previous
years. The bankruptcy  of  many  traditional defendants has  also  caused increased settlement demands
against those  policyholders  who  are not  in bankruptcy but remain in the tort system.  Currently, in  many
jurisdictions, those who  allege  very  serious injury  and  who can  present  credible medical evidence of
their  injuries  are receiving priority  trial  settings  in the  courts, while those who have not shown any
credible disease  manifestation are having their  hearing dates delayed or placed on an inactive docket.
This trend  of prioritizing  claims  involving credible evidence of  injuries, along  with the  focus on
defendants who  were  not  traditionally  primary targets  of  asbestos litigation, has contributed to the
claims  and claim adjustment expense  payments we experienced.

We also continue to be  involved  in  coverage litigation concerning a  number of policyholders, some

of  whom have  filed for  bankruptcy, who  in  some instances have asserted that all  or a portion of their
asbestos-related  claims  are  not  subject  to  aggregate  limits  on coverage. In these  instances, policyholders
also  may  assert that  each  individual  bodily injury  claim  should be treated as a  separate  occurrence
under  the  policy. It is  difficult  to predict  whether these policyholders will  be successful on both issues.
To  the  extent  both issues  are  resolved  in a policyholder’s favor and our other defenses are not
successful, our  coverage obligations  under the  policies at issue would be materially increased and
bounded  only by  the applicable  per-occurrence  limits and the number of asbestos bodily injury claims
against the policyholders.  Although we  have  seen  a moderation in the overall risk associated with these
lawsuits,  it remains  difficult  to  predict  the ultimate cost of these claims.

Further,  in  addition to  claims  against policyholders, proceedings have  been launched directly
against insurers, including  us, by  individuals challenging insurers’ conduct with respect to  the handling
of  past  asbestos claims and by  individuals seeking damages arising from alleged asbestos-related bodily
injuries. It is  possible  that  the  filing of  other direct actions against insurers, including us, could be made
in the  future. It  is difficult to  predict  the outcome of these proceedings, including whether the plaintiffs
will be able to  sustain  these actions against insurers  based on novel legal theories  of liability.

With  regard to  environmental  claims,  we have received and  continue to receive claims from

policyholders  who allege  that  they  are  liable for injury or damage arising  out  of their alleged
disposition of  toxic substances. Mostly,  these  claims arise under various legislative as  well as regulatory
efforts aimed  at  environmental  remediation. For instance, the Comprehensive Environmental Response,
Compensation  and Liability Act (CERCLA), enacted in  1980  and  later modified, enables private parties
as well  as  federal and  state governments  to take  action with  respect to releases and threatened releases
of  hazardous  substances. This federal  statute permits  the recovery of response costs from some liable
parties  and  may require liable parties to  undertake their  own remedial action. Liability  under CERCLA
and  similar  state  laws may be  imposed on certain parties even if they did  not cause the release or
threatened release of hazardous substances  and may be joint and several  with other responsible parties.

The Company has  been, and continues  to be, involved in litigation involving insurance coverage

issues  pertaining  to  asbestos and environmental  claims. The Company  believes  that some court

51

decisions  have interpreted  the insurance  coverage to be broader than the original intent  of the insurers
and  policyholders.  These decisions  continue to  be inconsistent and vary from jurisdiction to jurisdiction.

Uncertainties  surrounding the  final resolution of these asbestos and  environmental claims  continue,

and  it is  difficult  to estimate our  ultimate  liability  for such 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;

• a  further  increase  in  the  cost  to  resolve,  and/or  the number of, asbestos and environmental

claims  beyond that which  is  anticipated;

• the  emergence of a  greater number of asbestos  claims than anticipated as a result of extended

life  expectancies  resulting  from  medical advances and lifestyle improvements;

• the  role of any  umbrella  or  excess policies we have  issued;

• the  resolution or adjudication  of  disputes  concerning coverage for asbestos and environmental

claims  in  a  manner inconsistent  with  our  previous  assessment of these disputes;

• the  number and outcome of direct actions against us;

• future  developments  pertaining to  our ability to recover reinsurance for asbestos and

environmental  claims;

• any impact on asbestos  defendants  we insure due  to the bankruptcy of  other asbestos

defendants;

• the  unavailability  of  other  insurance sources  potentially available to policyholders, whether

through  exhaustion of  policy  limits or  through the  insolvency  of  other  participating  insurers;  and

• uncertainties  arising from the insolvency or bankruptcy of policyholders.

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.

While the  ongoing evaluation of  asbestos and environmental  claims and associated liabilities
considers  the inconsistencies  of court  decisions as  to  coverage, plaintiffs’ expanded theories of liability
and  the  risks inherent  in complex litigation and  other uncertainties, it is possible that the outcome  of
the  continued  uncertainties regarding these claims  could result in liability in future periods that  differs
from  current  reserves  by  an  amount  that  could  materially and adversely affect  our results of operations.
See the  ‘‘Asbestos Claims and Litigation’’ and  ‘‘Environmental  Claims and Litigation’’ sections  of
‘‘Item 7—Management’s  Discussion and  Analysis  of  Financial Condition and  Results of  Operations.’’
Also see ‘‘Item  3—Legal  Proceedings.’’

The  intense competition  that we face, and  the impact of  innovation,  technological change and
changing customer preferences on the  insurance industry and  the markets in which we operate, could
harm our  ability to  maintain  or increase our business volumes and our profitability. The property
and  casualty insurance industry is highly competitive, and we  believe that it will remain  highly
competitive for the  foreseeable future.  We compete with both domestic and foreign insurers which  may

52

offer  products  at  prices  and on terms  that  are  not  consistent with our economic  standards  in an effort
to maintain or  increase  their  business.  The  competitive environment  in which we  operate could also  be
impacted  by current  general  economic  conditions, which could reduce  the volume of business available
to us as  well as  to  our  competitors.  In  recent years, pension and hedge funds and other entities with
substantial available  capital  and  potentially  lower  return objectives have increasingly sought to
participate  in  the  property  and  casualty  insurance and  reinsurance businesses. Well-capitalized new
entrants to the  property and  casualty  insurance  and reinsurance  industries, existing  competitors that
receive substantial  infusions  of  capital,  as well  as competitors that can take advantage of more
favorable tax  domiciles  than the United  States, may conduct business in ways that adversely  impact  our
business  volumes and  profitability.  Further, an expanded supply of reinsurance capital may  lower costs
for insurers  that  rely  significantly  on reinsurance and, as  a consequence, those insurers may be able  to
price their products  more competitively.  In  addition,  the competitive environment could  be impacted by
changes  in customer  preferences,  including customer  demand  for direct distribution channels, not  only
in personal lines (where we currently  and  may  increasingly compete  against direct writers), but  also in
commercial lines  (where  direct  writers  may  become a more significant source of  competition in the
future, particularly  in the  small commercial market). Consolidation within the insurance industry also
could alter  the  competitive  environment  in  which we operate, which may  impact  our  business volumes
and/or  the rates  or  terms of our  products.

In  Personal  Insurance, the use  of comparative rating technologies has impacted, and may continue

to impact,  our business as well as the  industry as a whole. A  substantial amount of  the Company’s
Personal Insurance  new business  is written after an  agent compares quotes  using comparative rating
technologies, a  cost-efficient  means  of  obtaining quotes from multiple companies.  Because the use of
this  technology, whether by  agents  or  directly by  customers,  facilitates the process of generating
multiple quotes, the  technology  has increased price comparison on new business and, increasingly,  on
renewal business.  It  also has  resulted  in  an increase in the level of  quote activity and  a lower
percentage of quotes  that  result  in  new  business  from  customers, and these trends may continue or
accelerate. If we are  not  able  to operate with a  competitive  cost structure or accurately  estimate  and
price for claims  and  claim adjustment  expenses, our business volume and  underwriting margins could
be  adversely affected  over  time. Additionally,  similar technology is starting to be  used to  access
comparative rates  for small  commercial  business  and that trend may continue or  accelerate.

Technology companies  or  other third parties  have  created,  and may in the future create, digitally-
enabled  alternate  distribution  channels  for  personal or commercial business that may adversely impact
our competitive position. These  alternative  distribution channels may compete with us  directly by
providing, or arranging to  provide, insurance coverage themselves. See also  ‘‘Disruptions to our
relationships  with  our  independent  agents  and  brokers could adversely affect us’’ below.

Other  technological  changes  may  present competitive risks. For example, innovations, such as

telematics and other usage-based  methods  of  determining premiums, can impact product design and
pricing and may  become  an increasingly  important  competitive  factor.  In  addition,  our competitive
position could be  impacted if  we are  unable to deploy, in a  cost effective  manner, technology that
collects  and analyzes  a wide variety of  data points (so-called ‘‘big data’’  analysis) to make underwriting
or other  decisions,  or if  our  competitors collect and  use data which we do not have the ability to access
or use. See also  ‘‘Our business success  and profitability depend, in  part,  on effective  information
technology systems  and on continuing to develop and  implement improvements in technology’’ below.

Competitive dynamics  may  impact the  success of efforts to improve  our underwriting margins on
our insurance  products.  These efforts could include seeking improved rates, as well as improved terms
and  conditions,  and  could 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 addition, if our underwriting is  not effective,
further efforts to increase  rates could  also  lead  to ‘‘adverse selection’’, whereby accounts retained have
higher  losses, and  are  less profitable,  than accounts  lost.  For more detail,  see  ‘‘Item 7—Management’s
Discussion  and  Analysis  of  Financial  Condition and Results of Operations—Outlook.’’

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Similar to  other industries, the insurance  industry is undergoing rapid  and significant technological

and  other  change. Traditional  insurance  industry participants,  technology companies, ‘‘InsurTech’’
start-up  companies,  the number  of which  has increased  significantly in recent  years, and others are
focused on using technology and  innovation  to simplify  and improve the  customer  experience, increase
efficiencies, redesign  products,  alter business  models  and effect other potentially disruptive  changes in
the  insurance industry.  If we  do  not  anticipate,  keep  pace with and adapt to technological and other
changes  impacting  the  insurance  industry, it  could  harm our ability to compete, decrease the  value of
our products  to  customers,  and  materially and adversely affect our business. Furthermore, innovation,
technological  change  and  changing  customer preferences in  the markets in which we operate also pose
risks  to  our  business. For example, technologies  such as  driverless vehicles, assisted-driving
technologies, technologies  that  facilitate  ride or home sharing, smart homes  or automation could
reduce the  demand  for  certain  of our  products, create coverage issues or impact the frequency or
severity  of  losses,  and  we  may  not  be  able to  respond effectively.

Overall,  our competitive  position  in our various businesses is based on many factors, including  but

not limited to  our:

• ability  to  profitably price  our  business, retain existing customers and obtain new business;

• premiums charged, contract terms  and conditions, products and services offered (including the

ability to  design  customized programs);

• agent,  broker  and  policyholder  relationships;

• ability  to  keep pace relative to  our competitors  with changes in  technology  and information

systems;

• speed of  claims payment;

• ability  to  provide our products  and services in a cost effective manner;

• ability  to  adapt  to  changes  in  business models, technology, customer preferences or regulation

impacting  the markets  in  which we operate;

• perceived  overall financial  strength and  corresponding ratings assigned by independent rating

agencies;

• reputation,  experience and  qualifications of employees;

• geographic  scope  of business;  and

• local presence.

We may  have  difficulty in  continuing to compete successfully on any of these bases in the future. If

competition  or technological  or other  changes to  the markets in which  we operate limit our ability to
retain existing  business or  write new business at adequate rates  or  on appropriate  terms, our results of
operations could  be  materially  and adversely affected. See ‘‘Competition’’ sections of the discussion on
business  segments in  ‘‘Item 1—Business.’’

Disruptions  to our  relationships  with our  independent  agents and brokers could adversely affect

us. We market our insurance  products  primarily  through independent agents and  brokers. An
important part  of our business is written through less than a dozen  such intermediaries. Further,  there
has been a trend of  increased  consolidation by agents and  brokers, which could impact our
relationships  with,  and  fees paid to,  some  agents and  brokers, and/or otherwise negatively impact the
pricing or distribution of our products.  Agents and brokers may increasingly compete  with us to  the
extent  that markets increasingly provide  them  with direct access  to providers of capital seeking
exposure to  insurance  risk. See also ‘‘The intense competition that we face could harm our ability  to
maintain or increase our  business  volumes  and  our  profitability.’’ In all of the foregoing situations, loss

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of  all  or  a  substantial  portion  of the  business provided through such agents  and brokers could
materially and  adversely affect  our  future business volume and results of operations.

We may  also  seek to  develop new products or distribution channels, which  could  disrupt our

relationships  with  our  agents  and brokers.  In addition, agents and brokers may create alternate
distribution  channels  for  commercial  business that may  adversely impact product differentiation and
pricing. Access  to  greater  levels  of data  and  increased  utilization of technology by agents and  brokers
may also impact our relationship  with  them and  our competitive position. In certain  markets, brokers
increasingly have been  packaging  portfolios of risks together  and offering them to a narrower range  of
carriers as well  as,  in  some  cases,  requesting  a  commitment to  participate in such portfolios in advance.
Our efforts or their efforts with  respect  to new  products or alternate distribution channels, as well as
changes  in the  way  agents  and  brokers  utilize data and  technology, could adversely impact our business
relationship with  independent  agents  and brokers  who currently market our  products, resulting  in  a
lower volume  and/or  profitability  of business generated from these sources.

We rely  on  internet  applications for  the marketing and sale of  certain of our products, and we  may

increasingly rely  on internet applications  and toll-free numbers for distribution. In some instances,  our
agents  and  brokers  are  required to  access separate  business platforms to execute the sale of our
personal insurance  or  commercial insurance products. Should internet disruptions occur, or frustration
with our business platforms  or  distribution initiatives develop among our  independent agents and
brokers,  any  resulting  loss of  business  could  materially  and adversely affect our future business volume
and  results of  operations.  See ‘‘If we  experience difficulties with technology, data security and/or
outsourcing  relationships, our  ability  to  conduct our  business could be negatively impacted’’  below.

Customers  in the  past  have  brought claims  against us for the  actions of our agents. Even with
proper controls in  place, actual or  alleged errors or inaccuracies by our agents could result in  our
involvement in  disputes,  litigation or  regulatory actions related to actions  taken or not taken  by our
agents.

We  are exposed to,  and  may  face adverse developments involving,  mass  tort  claims such as those

In addition to asbestos and

relating  to exposure to  potentially harmful products or substances.
environmental claims, we  face exposure  to other types  of mass  tort claims,  including  claims related  to
exposure to  potentially harmful products or substances, such as lead paint, silica and welding rod
fumes. Establishing claims  and  claim  adjustment expense reserves for mass tort claims is subject  to
uncertainties  because  of many factors,  including expanded theories of liability, disputes concerning
medical causation  with  respect  to certain diseases,  geographical concentration of the lawsuits asserting
the  claims  and  the  potential  for  a  large  rise in  the total number of  claims without underlying
epidemiological  developments suggesting  an  increase in  disease rates. Moreover, evolving judicial
interpretations  regarding  the  application  of various tort theories  and  defenses, including application of
various  theories  of  joint  and  several  liabilities, as well as  the  application of insurance coverage to these
claims,  make  it  difficult to  estimate  our  ultimate  liability for such claims.

Because  of the  uncertainties  set forth above, additional  liabilities may arise for amounts in excess
of  the current related  reserves. In addition, our estimate of claims and claim adjustment expenses  may
change,  and  such  change  could be  material. These additional liabilities  or increases in estimates, or  a
range of  either,  cannot  now be  reasonably estimated and could materially and adversely affect our
results  of operations.

The  effects  of  emerging  claim and coverage issues on our  business are uncertain. As industry

practices  and  legal,  judicial, social  and  other  environmental conditions change, unexpected and
unintended  issues  related  to claim and  coverage may  emerge.  These issues may adversely affect our
business,  including  by  extending  coverage beyond  our underwriting intent, by increasing the number,

55

size or  types  of  claims  or  by  mandating  changes to  our underwriting practices.  Examples  of emerging
claims  and coverage  issues  include,  but  are  not  limited to:

• judicial  expansion  of  policy  coverage and the  impact of new or expanded theories of liability;

• plaintiffs targeting property and  casualty insurers, including us, in purported class  action

litigation  relating  to  claims-handling  and other practices;

• claims  relating to  construction defects, which often present  complex coverage and damage

valuation  questions;

• claims  under  directors’ & officers’ insurance policies  relating to losses from involvement in
financial market activities, such  as mortgage  or  financial product origination, distribution,
structuring  or  servicing  and foreclosure procedures; failed  financial  institutions;  fraud; improper
sales practices;  possible accounting irregularities;  and corporate  governance issues;

• claims  related to  data  and  network security breaches,  information system failures or cyber-

attacks, including  cases where  coverage  was  not intended  to  be provided;

• the  assertion  of  ‘‘public nuisance’’  or similar theories  of liability, pursuant to  which plaintiffs

seek to  recover monies  spent  to administer  public health  care  programs,  abate hazards  to public
health  and  safety  and/or recover  damages purportedly attributable  to a ‘‘public nuisance’’;

• claims  related to  liability or workers’  compensation arising out of the spread of  infectious disease

or pandemic;

• claims  relating to  abuse  by  an employee or a volunteer of an insured;

• claims  that link health  issues  to  particular causes  (for  example, cumulative  traumatic head injury

from sports or  other causes),  resulting in liability  or  workers’  compensation  claims;

• claims  alleging that  one  or more  of our underwriting  criteria have  a disparate impact on  persons

belonging to  a protected class  in violation of the law, including the  Fair Housing Act;

• claims  arising out  of  modern  techniques  and practices used in connection with the extraction of

natural  resources, such  as  hydraulic fracturing or wastewater injection;

• claims  arising out  of  the use of  personal cars, homes  or other property in  commercial

transactions,  such  as  ride or home sharing;

• claims  relating to  unanticipated  consequences  of  current or new technologies  or business  models

or  processes,  including  as  a  result  of  related  behavioral  changes;  and

• claims  relating to  potentially changing  climate  conditions, including higher frequency and severity

of  weather-related  events.

In  some instances,  these emerging  issues may not become apparent  for  some time after we have

issued  the affected  insurance  policies. As a result, the full extent  of liability under our insurance
policies  may not  be known for many years after the  policies are issued.

In  addition,  the potential  passage of  new legislation designed to expand the  right to sue, to  remove
limitations on  recovery,  to deem  by  statute the existence of a  covered occurrence,  to extend the statutes
of  limitations or  otherwise  to  repeal  or  weaken tort reforms could  have an adverse impact on our
business.

The effects of  these  and other unforeseen emerging claim and coverage issues are extremely hard

to predict and could harm  our  business  and materially  and adversely affect our results of  operations.

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We  may  not  be  able to  collect all  amounts due to us  from reinsurers, reinsurance coverage may
not be available  to  us in  the  future at  commercially reasonable rates or at all and  we are exposed  to
credit risk related to our structured settlements. Although the reinsurer is liable to  us to the  extent
of  the ceded  reinsurance,  we  remain  liable  as the  direct  insurer on all  risks  reinsured.  As  a result,
ceded  reinsurance arrangements  do not  eliminate our  obligation  to pay claims.  Accordingly, we  are
subject to  credit  risk  with respect  to our  ability  to  recover  amounts  due  from  reinsurers.

In  the past, certain reinsurers  have  ceased writing  business  and  entered  into runoff.  Some  of  our

reinsurance claims may  be  disputed  by  the reinsurers, and  we may ultimately receive  partial or no
payment. This is a  particular  risk  in  the  case of claims that relate to  insurance  policies  written many
years  ago, including  those relating  to  asbestos and  environmental claims. In  addition,  in a  number  of
jurisdictions,  particularly  the European  Union  and the United  Kingdom, a  reinsurer  is permitted  to
transfer a reinsurance arrangement to  another reinsurer,  which  may  be less creditworthy, without a
counterparty’s  consent,  provided  that  the transfer  has been approved by  the applicable regulatory
and/or  court  authority.

Included  in  reinsurance  recoverables  are  amounts related  to  certain  structured settlements.
Structured  settlements  are  annuities  purchased from various life insurance  companies  to settle  certain
personal physical injury  claims, of  which  workers’  compensation claims  comprise a  significant portion.
In  cases where we  did  not receive  a  release  from the claimant,  the structured  settlement  is included  in
reinsurance recoverables and  the  related  claim cost is included in  the  liability  for  claims  and  claim
adjustment  expense  reserves,  as  we retain the contingent  liability  to  the  claimant.  Some  of  the  life
insurance companies  from  which we  have purchased structured settlements  have been downgraded  to
below investment  grade  credit  ratings  subsequent to  the time  of  the purchase.  If it  is expected that the
life  insurance company is not able  to  pay, we  would recognize  an  impairment of the related  reinsurance
recoverable  if,  and to  the  extent, the  purchased  annuities are  not  covered by  state guaranty
associations.  In the  event that  the life  insurance company fails to  make the required annuity  payments,
we would be  required  to make  such  payments. For  a discussion of our  top  reinsurance groups  by
reinsurance recoverable  and  the  top  five  groups by  amount  of  structured settlements  provided, see
‘‘Item 7—Management’s Discussion and  Analysis of Financial  Condition  and  Results of  Operations—
Reinsurance  Recoverables.’’

The availability and cost  of reinsurance are subject to prevailing market conditions, both in terms

of  price and  available capacity.  The  availability of reinsurance capacity  can  be impacted  by general
economic conditions and  conditions  in  the reinsurance  market,  such  as  the occurrence  of  significant
reinsured  events.  The  availability and  cost of reinsurance  could  affect our  business volume and
profitability.  In  addition,  certain  countries, particularly in  Europe,  recently  have  been  pressuring  the
U.S. to  reduce its  regulatory  requirements for U.S. ceding companies  to obtain collateral  from
reinsurers  located  outside  the  United  States  which,  if  successful, could  make  it  more  difficult for  U.S.
companies, including  us, to obtain  sufficient collateral, if any,  in such reinsurance  arrangements.

Because of  the risks set  forth above, we  may  not be  able to collect  all amounts due to  us from

reinsurers,  and  reinsurance coverage may not be  available to us  in  the  future  at commercially
reasonable rates  or at all,  and/or life insurance companies  may  fail  to  make  required  annuity payments,
and  thus our  results of operations could  be materially and  adversely  affected.

We  are  also exposed to  credit risk in certain of our  insurance operations  and with respect  to

certain  guarantee  or indemnification arrangements that we  have  with third  parties.
exposure to  credit  risk  related to our  investment  portfolio and  reinsurance recoverables (discussed
above),  we  are  exposed  to  credit risk  in  several other areas of our business operations, including credit
risk  relating to  policyholders,  independent  agents  and  brokers.

In addition to

We are  exposed  to credit  risk in  our surety insurance operations,  where we  guarantee to a  third
party  that our  customer will satisfy certain performance obligations (e.g., a construction contract) or

57

certain  financial  obligations,  including  exposure to large customers  who  may have obligations to
multiple third  parties. If  our  customer  defaults, we may suffer losses and  not be reimbursed by that
customer.  In  addition,  it is customary  practice in the  surety business for multiple insurers to participate
as co-sureties  on  large  surety  bonds.  Under these arrangements, the co-surety obligations  are typically
joint and several, in  which  case we  are  also exposed  to credit risk with  respect to our co-sureties.

In  addition,  a  portion  of  our  business is written with large deductible insurance policies. Under

casualty  insurance  contracts  with  deductible features, we  are obligated to pay  the claimant the full
amount of the settled claim. We are  subsequently  reimbursed by the contractholder for the deductible
amount, and,  as  a  result,  we  are  exposed  to  credit  risk to the policyholder. Moreover, certain
policyholders  purchase  retrospectively  rated workers’ compensation and/or general liability policies
(i.e., policies in  which premiums are  adjusted after  the policy period based on the  actual loss
experience  of  the policyholder  during  the  policy  period). Retrospectively  rated policies expose us to
additional  credit  risk  to the  extent that  the  adjusted  premium is greater than the original premium.

Our efforts  to  mitigate  the  credit risk that we  have to our insureds may not be successful. To

reduce such  credit  risk, we  require  certain insureds to post collateral for some  or all of these
obligations,  often in  the form of  pledged securities  such as money  market funds or  letters of credit
provided  by banks,  surety bonds or  cash.  In cases where we receive pledged securities and the insureds
are unable to  honor  their  obligations,  we  may  be exposed to credit risk  on the securities pledged and/or
the  risk that  our  access to that  collateral  may be stayed during  an insured’s bankruptcy. In cases  where
we receive  letters  of  credit  from  banks  and the insureds are unable to honor their obligations, we are
exposed to  the credit  risk  of  the banks  that issued  the letters of credit.

In  accordance  with industry practice,  when  policyholders purchase insurance policies from us
through  independent agents and  brokers, the  premiums relating to those policies are often paid to  the
agents  and  brokers  for payment  to  us.  In  most  jurisdictions, the premiums will be deemed to have  been
paid to us whether or  not they are  actually received by us. Consequently, we assume  a degree of credit
risk  associated with  amounts  due  from  independent agents and brokers.

To  a  large degree, the credit  risk we face is a function of the economy; accordingly, we face a
greater risk  in an economic  downturn.  While we attempt to manage the risks discussed above through
underwriting  guidelines,  collateral requirements and other oversight mechanisms, our efforts may not
be  successful.  For  example, collateral  obtained  may  subsequently have little or  no value. Further, the
amount of collateral  protection we  have  been able to obtain on the business we write in certain
markets has decreased, and  may  continue to  decrease, as a  result of competition.  We are also exposed
to credit risk  related to certain  guarantee or indemnification arrangements that we have with third
parties.  See  note 16 of  notes  to  the consolidated financial statements. As a result,  our  exposure to  the
above  credit risks could  materially  and  adversely affect  our results of operations.

Within  the United  States,  our businesses  are heavily regulated by the states in which we conduct
business, including licensing and supervision,  and changes in regulation  may reduce our  profitability
and  limit our growth. These  regulatory systems are  generally designed to protect the  interests of
policyholders, and not  necessarily the interests of insurers, their shareholders and other investors. For
example, to protect policyholders whose  insurance  company becomes financially insolvent, guaranty
funds  have been established  in all 50  states  to pay  the covered claims of  policyholders in the event  of
an  insolvency of  an  insurer,  subject to applicable state  limits. The  funding of guaranty funds is provided
through  assessments  levied  against remaining  insurers  in the marketplace. As a result, the insolvency  of
one  or  more  insurance companies  could result in  additional assessments  levied against us.  In  addition,
several  states  restrict  the timing and/or  the  ability of  an insurer to discontinue writing a line of  business
or to  cancel  or non-renew certain policies.

These  regulatory  systems  also address  authorization  for lines of business, statutory capital  and

surplus requirements, limitations  on  the types and amounts of certain investments, underwriting

58

limitations, transactions with affiliates,  dividend limitations, changes in control, premium rates and  a
variety  of other  financial and  non-financial components of an insurer’s business including, most
recently,  cyber-security.

The state insurance regulatory  framework has  been  under continuing scrutiny, and some state
legislatures  have  considered or  enacted  laws  that  may alter or increase state authority  to regulate
insurance companies  and  insurance  holding companies. Further, the  NAIC and  state  insurance
regulators  continually re-examine  existing laws and  regulations, specifically focusing on  modifications  to
holding  company  regulations, interpretations of  existing  laws and  the development of new laws and
regulations.

As part  of  these  changes,  insurance  holding company regulations were amended to require insurers

who  are part  of  a  holding company  system to  file an enterprise risk report to provide the lead
insurance regulator  with  a summary  of  the company’s Enterprise  Risk  Management (ERM) framework
including the material risks  within  the  insurance holding company system that could pose risk to the
insurance entities  within the  holding  company system.  Insurers having premium volume above certain
thresholds,  including the Company,  are  also  required  to perform at least annually a self-assessment  of
their  current  and  future risks,  including  their  likely future solvency position (known as an own risk and
solvency  assessment or  ORSA)  and file  a  confidential report with the  insurer’s  lead insurance regulator.
The requirement for  an  insurer  to conduct an  ORSA  is  intended to foster an  effective level of ERM  at
all insurers within a  holding company  system, and  to provide a  group-wide perspective on risk and
capital as a supplement to the  legal  entity view. ORSA is  now included in the  International Association
of  Insurance Supervisors  (IAIS)  standards  and is in various stages of implementation in the United
States, Europe, Canada,  and  other  jurisdictions. It  is  possible that, as  a result of ORSA  and the manner
in which it may  be  used by insurance  regulators,  our  states of  domicile or other  regulatory  bodies may
require changes  in our  ERM  process  (e.g., prescribe the use of specific models or the application of
certain  assumptions in  the  Company’s  models) that have the effect of limiting our ability to write
certain  risks, limit  our risk appetite  to  write additional  business or reduce our capital management
flexibility. See  ‘‘Enterprise  Risk Management’’ for  further discussion of the Company’s ERM.

The NAIC  and  state insurance  regulators, as  well  as the  Federal Reserve and Federal Insurance
Office,  are currently  working  with  the  IAIS  to develop a  global common framework (ComFrame)  for
the  supervision of  internationally active  insurance groups  (IAIGs). If adopted,  ComFrame  would
require the designation  of  a group-wide  supervisor (regulator) for each IAIG and would impose  a
group  capital  requirement  that  would  be applied to an IAIG in addition to the current legal entity
capital requirements imposed by state  insurance  regulators. In response to ComFrame, the NAIC
developed a  model  law that  allows  state  insurance regulators in the U.S. to be designated as
group-wide supervisors  for U.S. based  IAIGs. Additionally, the NAIC is developing  a  group capital
analytical tool  that would  be  applied  to  U.S. based  insurance  groups in addition to the risk-based
capital (RBC)  requirement  that is  applied on a legal entity basis. These regulatory developments could
increase the amount  of capital  that the  Company  is  required  to have and could result in  the Company
being subject to  increased  regulatory requirements.

Regulators  may  choose to adopt  more  restrictive insurance laws and regulations  that could, among

other  things,  restrict the ability of insurance subsidiaries to distribute funds to their parent companies
or they could reject rate  increases due to the  economic environment. The  state insurance regulators
may also increase  the statutory capital  and surplus requirements for our insurance subsidiaries. In
addition,  state  tax laws that  specifically  impact the insurance industry,  such as premium taxes or other
taxes,  could be  enacted  or changed by  states to raise  revenues.

State laws  or regulations  that are adopted or amended may be more  restrictive than current laws

or regulations and may result  in lower revenues and/or higher costs of compliance and thus could
materially and  adversely affect our results of operations  and limit our growth.

59

A  downgrade  in  our claims-paying  and financial strength  ratings  could adversely impact our

business  volumes,  adversely  impact  our  ability  to  access the capital markets and increase our
borrowing  costs. Claims-paying  and  financial strength ratings are important to an insurer’s competitive
position. Rating  agencies  periodically  review insurers’ ratings and change their ratings  criteria;
therefore, our  current  ratings  may  not  be maintained in the future. A downgrade in  one or more of  our
ratings  could  negatively  impact  our  business volumes because demand for certain of our products may
be  reduced,  particularly because  many  customers may require  that  we maintain minimum ratings to
enter  into, maintain or renew  business  with us. Additionally, we may find it more difficult to access  the
capital  markets  and we  may  incur  higher borrowing costs. If significant losses, including, but not limited
to,  those resulting  from  one or  more  major  catastrophes, or significant reserve additions or significant
investment  losses  were  to  cause  our  capital  position to  deteriorate significantly, or if  one or more rating
agencies substantially  increase  their  capital requirements, we may need to raise equity  capital in the
future  (which we  may  not  be  able to do  at a reasonable cost or at all,  especially at a time of  financial
market disruption)  in order  to maintain  our ratings or limit the extent of a downgrade.  A continued
trend  of more frequent and  severe  weather-related catastrophes or a prolonged financial market
disruption  or  economic downturn  may  lead rating agencies to substantially increase their  capital
requirements.  See also  ‘‘During  or following a period of financial market  disruption or economic
downturn,  our business  could  be  materially and adversely affected.’’ For further discussion about our
ratings, see ‘‘Item  1—Business—Ratings.’’

The  inability  of  our  insurance subsidiaries to pay dividends to our holding company in sufficient

amounts  would harm  our ability  to  meet our obligations, pay future shareholder dividends or make
future share  repurchases. Our  holding company relies on dividends from our U.S. insurance
subsidiaries to  meet  our  obligations for  payment  of  interest and principal on outstanding  debt, to pay
dividends to  shareholders,  to  make contributions to  our  qualified domestic pension plan, to  pay other
corporate expenses  and  to make  share  repurchases.  The ability of our insurance  subsidiaries to pay
dividends to  our holding company  in  the future will depend  on their statutory capital and surplus,
earnings  and  regulatory  restrictions.

We are  subject to  state  insurance regulation  as an insurance holding company system. Our U.S.

insurance subsidiaries  are subject to various regulatory  restrictions that  limit  the maximum  amount  of
dividends available to  be paid to  their  parent without  prior  approval of  insurance regulatory authorities.
In  a  time of  prolonged economic downturn or otherwise, insurance regulators may  choose to further
restrict  the  ability  of  insurance subsidiaries  to make  payments to their  parent companies. The ability  of
our insurance  subsidiaries  to  pay dividends to  our  holding company is also restricted by  regulations  that
set  standards  of solvency  that must  be  met and maintained.

The inability of  our insurance  subsidiaries  to pay  dividends to  our holding company in an amount

sufficient to  meet  our  debt  service  obligations and other  cash  requirements could harm our ability  to
meet our obligations, to  pay future shareholder  dividends and to make  share repurchases.

Our efforts  to  develop  new  products or expand  in targeted markets may not be successful and

may  create enhanced  risks. A  number  of our recent and planned  business  initiatives involve
developing new  products or  expanding  existing products in targeted markets.  This includes the
following efforts,  from time  to  time, to  protect  or grow market share:

• We  may develop  products that  insure risks  we have not previously insured, contain new coverage

or coverage terms  or contain  different commission terms.

• We  may refine  our underwriting  processes.

• We  may seek to  expand  distribution  channels.

• We  may focus  on  geographic  markets within or outside of the United States where we have had

relatively little or  no  market share.

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We may  not be  successful  in introducing new products or expanding in targeted markets and, even

if  we  are  successful, these  efforts may  create enhanced risks. Among other risks:

• Demand  for  new products  or in  new markets may  not  meet our expectations.

• To the  extent  we  are able to  market new products or expand in  new markets, our risk exposures

may change,  and the  data  and models we use to  manage such exposures  may not be as
sophisticated or  effective as those we use in existing markets or with  existing  products.  This,  in
turn, could  lead to losses in excess of our expectations.

• Models  underlying automated  underwriting and  pricing decisions may not be effective.

• Efforts  to develop new  products  or markets  have the potential  to create or increase distribution
channel  conflict, such as described  above under ‘‘—Disruptions to our  relationships with our
independent agents  and  brokers  could adversely affect  us.’’

• In  connection  with  the conversion of existing policyholders to a new product, some

policyholders’  pricing  may increase,  while the pricing  for other policyholders may  decrease,  the
net  impact  of  which could negatively impact  retention  and profit margins.

• To develop new products or markets,  we may need  to make substantial capital and operating

expenditures, which may also negatively impact  results in  the near term.

If our  efforts to  develop new  products or  expand  in targeted  markets are not successful, our results

of  operations  could be  materially and  adversely affected.

We  may  be adversely  affected if  our pricing and capital models provide  materially different
indications than  actual  results. The  profitability of our property  and casualty business substantially
depends  on  the extent to which  our  actual claims experience is consistent with the assumptions we use
in pricing  our  policies.  We utilize proprietary and third party models to help us price business in a
manner that  is  intended  to  be consistent, over time, with actual  results and return objectives. We
incorporate the  Company’s historical  loss  experience, external  industry data and economic indices into
our modeling  processes, and  we use various methods, including predictive modeling,  forecasting and
sophisticated simulation modeling  techniques,  to analyze  loss trends and the  risks associated  with our
assets  and liabilities.  We  also  use  these  modeling processes, analyses and methods in making
underwriting,  pricing  and  reinsurance  decisions  as part  of managing our  exposure to catastrophes and
other  extreme  adverse events.  These  modeling processes incorporate  numerous assumptions  and
forecasts about  the future  level  and variability of: frequency and severity of losses, inflation, interest
rates  and capital requirements,  among  others, that  are  difficult to make and may differ materially  from
actual results.

Whether we use a  proprietary or  third party  model,  future experience may be  materially  different
from  past and current experience  incorporated in a  model’s forecasts or  simulations. This includes the
likelihood of events occurring or continuing or the correlation  among events. Third party models may
provide  substantially different indications than  what  our  proprietary modeling  processes provide.  As  a
result, third  party model estimates of losses can  be,  and often have been, materially different for similar
events in comparison to  our proprietary estimates. The  differences between third party  model  estimates
and  our  proprietary  estimates  are driven by the use  of  different  data sets as  well as different
assumptions and forecasts  regarding the frequency  and severity of events  and claims arising from the
events.

If we fail to  appropriately price the  risks  we insure, or fail  to change our  pricing models to

appropriately  reflect our current experience, or if our claims experience is more frequent or severe  than
our underlying risk assumptions, our  profit margins may  be negatively affected. If  we underestimate the
frequency and/or  severity  of extreme  adverse events occurring, our financial  condition may be adversely
affected. If we  overestimate  the risks we  are exposed  to, we may overprice  our products, and new

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business  growth and retention of  our  existing business  may be adversely affected. As  we expand into
different markets  and  geographies,  we  will write  more policies in markets and  geographical areas where
we have  less  data  specific to  these new  markets and geographies,  and, accordingly, we may be more
susceptible  to error in  our  models  and  strategy. See ‘‘Item 7—Management’s Discussion and  Analysis
of  Financial  Condition and  Results  of  Operations—Catastrophe Modeling.’’

Our business success  and  profitability depend, in  part, on effective information technology systems

and  on  continuing to  develop and implement improvements in technology. We depend in large part
on  our technology  systems  for  conducting  business  and processing claims, as well as for providing  the
data  and  analytics  we  utilize  to manage  our  business, and thus  our business success is dependent on
maintaining  the  effectiveness  of existing  technology  systems and on continuing to develop  and enhance
technology systems  that  support our  business  processes and strategic initiatives in a cost and resource
efficient manner.  Some  system  development  projects  are  long-term in nature, may negatively impact
our expense ratios  as  we invest in  the  projects and may cost more than we expect to complete. In
addition,  system  development  projects  may not deliver the benefits or perform as expected, or may be
replaced or become  obsolete more  quickly  than expected, which could result in operational difficulties,
additional  costs  or accelerated  recognition of expenses. If we do not effectively and efficiently manage
and  upgrade  our technology portfolio,  or if the costs  of doing  so are higher than  we expect,  our  ability
to provide competitive services  to,  and  conduct business with, new and existing  customers in a cost
effective  manner  and our  ability to  implement our strategic initiatives could be  adversely impacted.

If  we  experience  difficulties  with  technology,  data and network security (including as a result of

cyber  attacks),  outsourcing  relationships,  or cloud-based technology, our ability to conduct our
business  could  be  negatively  impacted. While technology can streamline  many business processes  and
ultimately reduce  the  cost of operations,  technology  initiatives present significant risks. Our business is
highly dependent  upon our employees’  ability to  perform, in an  efficient and uninterrupted fashion,
necessary business  functions.  A  shut-down of, or inability to access, one  or more of our facilities
(including our primary data  processing  facility); a power outage; or a failure of one or more of our
information technology,  telecommunications  or  other  systems could significantly impair our ability  to
perform  such  functions on a timely basis, particularly if such an interruption lasts for  an extended
period of time.  In  the  event of a computer virus  or  disaster such as a natural catastrophe, terrorist
attack  or  industrial accident, our  systems could be inaccessible for an extended period of  time. In
addition,  because  our information  technology  and  telecommunications systems increasingly interface
with and depend  on  third-party systems,  including cloud-based, we could experience service denials  or
failures of controls if demand  for  our  service exceeds capacity or  a third-party  system fails or
experiences  an  interruption.  Business  interruptions and  failures of controls could  also  result if our
internal  systems  do not  interface  with  each  other  as intended. Business  continuity can also be disrupted
by  an  event, such as a  pandemic, that  renders large  numbers of a workforce unable to work as needed,
particularly at critical locations; for  example, our  largest  location employs about 20% of our employees.
If our  business  continuity plans  did  not  sufficiently address a business  interruption, system failure  or
service  denial, this  could result  in a deterioration  of  our ability to write and process new and renewal
business,  provide  customer  service, pay claims in a  timely manner or  perform other necessary business
functions.

Our operations rely  on  the reliable and secure processing, storage  and transmission of  confidential

and  other  information  in our computer  systems and networks. Computer viruses, hackers (including
individuals, organizations or rogue states) and  employee or vendor misconduct, and other external
hazards, could expose our data systems  to  security  breaches, cyber-attacks or other  disruptions. In
addition,  we routinely  transmit and receive  personal, confidential and proprietary information by e-mail
and  other  electronic means.  While we  attempt to develop secure transmission capabilities with third-
party  vendors  and  others with whom we  do business,  we may be unable  to put in place  secure

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capabilities  with  all of such vendors  and  third parties and, in addition, these third parties may  not  have
appropriate  controls  in place  to protect  the confidentiality  of the information.

Like other  global  companies, our computer  systems are regularly subject to and will continue to be
the  target of  computer  viruses,  malware  or  other malicious codes,  unauthorized access, cyber-attacks or
other  computer-related  penetrations.  While  we  have experienced threats to our data and systems, to
date, we  are not aware  that  we have  experienced a material cyber-security breach. However, over time,
the  sophistication of  these threats  continues to  increase.  Our administrative and technical controls  as
well as  other preventative actions  we  take to reduce  the risk of cyber incidents and protect our
information may be  insufficient to  detect or prevent  unauthorized access, other physical  and electronic
break-ins, cyber-attacks  or  other  security breaches to  our  computer systems or those of  third parties
with whom we do business.  In  addition,  new technology that could result in  greater operational
efficiency may further expose  our computer systems to  the risk  of cyber-attacks.

We have outsourced certain technology and  business  process functions to third parties and may

increasingly do  so in  the future. If  we  do not  effectively  develop, implement and monitor our
outsourcing  relationships, if third  party  providers do not perform as anticipated, if we experience
technological  or  other  problems  with  a  transition,  or  if  outsourcing relationships relevant to our
business  process functions are  terminated,  we may not  realize  expected productivity improvements or
cost  efficiencies and  may  experience  operational difficulties, increased  costs and a loss of business. Our
outsourcing  of  certain  technology and  business process functions to third parties may expose us  to
increased  risk  related to  data  security,  service disruptions  or the effectiveness of  our  control system,
which could result  in monetary  and reputational damages or harm to our competitive position. See also
‘‘We could  be adversely  affected if our  controls designed to ensure compliance with guidelines, policies
and  legal and regulatory standards are  not  effective.’’ In  addition to risks caused by third party
providers, our  ability  to  receive services  from third party providers  outside of the  United States might
be  impacted  by  cultural  differences, political instability, unanticipated regulatory requirements or public
policy  inside or  outside of  the  United  States.

The increased  risks  identified above could expose us  to  data loss, disruption of service, monetary
and  reputational  damages,  competitive  disadvantage and significant increases  in compliance costs  and
costs to improve  the security and  resiliency  of  our computer systems.  The compromise of personal,
confidential  or  proprietary  information  could also  subject us to legal liability or regulatory action under
evolving cyber-security, data  protection  and privacy laws and regulations enacted by the U.S. federal
and  state  governments, Canada,  the  European Union  or  other jurisdictions or by various regulatory
organizations  or exchanges. As  a  result,  our ability to conduct our business and our results of
operations might  be  materially and  adversely  affected.

Changes in U.S.  tax  laws  or in  the  tax laws of other jurisdictions in which we operate could
adversely impact us. Tax  laws may  change in ways  that adversely impact  us. For example, federal  tax
legislation could  be enacted to reduce  the existing statutory U.S. federal corporate income tax rate
from  35%, which  would, accordingly,  reduce any U.S. deferred  tax asset. The amount of any net
deferred tax asset  is volatile  and  significantly impacted by changes in unrealized investment gains and
losses.  The  effect  of  a reduction  in  a  tax rate on net deferred tax assets is required to be recognized,  in
full, as a  reduction  of  income  from continuing operations in the  period when enacted and, along with
other changes  in the  tax  rules that  may  increase the Company’s actual tax expense, could materially  and
adversely affect  our  results  of  operations. In addition,  a reduction  in the existing statutory U.S.  federal
corporate  income  tax  rate  could  increase the  after-tax effect of future significant loss events and our
after-tax  borrowing  costs.

Our  investment portfolio  has benefited  from certain tax exemptions and certain other  tax laws  and
regulations, including, but not  limited  to, those governing dividends-received deductions and tax credits
(such as foreign tax  credits).  Federal  and/or state tax legislation could be enacted in connection  with

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deficit reduction  or  various  types of  fundamental tax  reform that would lessen or eliminate  some or  all
of  the tax advantages  currently  benefiting us and therefore could materially and adversely impact our
results  of operations.  In  addition,  such  legislation could adversely affect the value of our investment
portfolio, particularly changes to  the  taxation of interest  from municipal bonds  (which comprise 45%  of
our investment  portfolio  as  of  December  31, 2016),  which could  materially and  adversely impact the
value of those  bonds.

Other  tax law  changes  could  materially and  adversely  impact our results of operations. For
example, budget  constraints faced by  many  states  and localities increase the likelihood that state and
local governments will raise  revenue  by  enacting legislation increasing the taxes paid by individuals  and
corporations.  In  addition, any  federal  tax reform that is designed to reduce the U.S. federal corporate
income  tax rate  in a  ‘‘revenue neutral’’  manner  could  include other provisions that materially increase
our taxable income  or  otherwise  increase our cost of doing business. For  example, potential tax reform
in the  United  States  could  include  a  destination-based, border-adjustable  consumption tax  system
and/or  tariffs  that  could  impact  the cost  of reinsurance and/or imported materials which could increase
our loss costs.

We  are also subject  to a number  of  additional risks associated with  our business outside the

United  States. We  conduct business  outside the United  States primarily in Canada,  the United
Kingdom and the Republic of  Ireland.  In addition, we conduct business in Brazil, primarily  through  a
joint venture, and  we have an indirect  interest in  a joint venture in Colombia. We may also explore
opportunities  in other  countries, including other Latin  American countries and other  emerging markets
such as India.

In  conducting  business  outside of  the  United  States, we are also subject to a number of  additional
risks, particularly  in emerging  economies.  These risks include restrictions such  as price controls, capital
controls,  currency  exchange  limits,  ownership limits  and  other restrictive or anti-competitive
governmental  actions  or  requirements,  which could  have  an adverse effect  on our business and  our
reputation.  A portion of  our premiums  from  outside of the United States  is generated in Canada,  a
substantial portion  of  which consists  of  automobile premiums from the  province of Ontario, which is  a
highly regulated  market. Our  business  activities  outside the United States may  also subject us to
currency  risk and, in some markets,  it  may  be difficult to effectively hedge that risk, or we may choose
not to  hedge  that  risk. In  addition,  in  some  markets, we may invest as part of a joint venture with a
local counterparty.  Because  our  governance  rights  may be  limited,  we may not  have control over the
ability  of  the  joint  venture  to  make certain decisions and/or mitigate risks it faces, and significant
disagreements  with  a joint  venture  counterparty may adversely impact our  investment and/or
reputation.  Our business activities outside  the United States could  subject us  to increased volatility  in
earnings  resulting from  the  need  to recognize  and subsequently revise a valuation allowance associated
with income  taxes if we  became  unable  to  fully utilize any deferred  tax assets, including loss carry-
forwards from those foreign  operations.  Also, political instability, particularly in emerging economies,
and  changing market conditions around  the globe,  could result in financial market disruption or an
economic downturn in  such  regions.

Our business  activities  outside the  United States also subject us to  additional domestic and  foreign

laws and  regulations, including the  Foreign Corrupt Practices Act and similar laws in other countries
that  prohibit the making of improper  payments to  foreign officials. Although we have policies and
controls  in place  that  are  designed to ensure  compliance with  these laws, if those controls  are
ineffective  and an employee  or intermediary fails  to  comply with applicable laws and regulations, we
could suffer civil  and criminal penalties  and our  business and our reputation could be adversely
affected. Some countries,  particularly  emerging economies, have laws and  regulations  that lack clarity
and, even with local  expertise  and effective controls,  it can be difficult to  determine the exact
requirements  of,  and potential  liability  under, the  local  laws. In some jurisdictions, including Brazil,
parties  to a joint venture  may, in  some  circumstances, have liability for some obligations  of the venture,

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and  that liability  may  extend  beyond  the  capital invested. Failure to comply with local laws in  a
particular  market may result  in substantial  liability and  could have a significant and negative  effect not
only on our business  in that  market but  also  on  our reputation generally.

In  addition,  competition  for  skilled  employees in  developing markets  and other non-U.S. locations

may be intense. If  we  are  not  able  to  hire, integrate,  motivate and  retain a sufficient number of
employees  with  the  knowledge and  background necessary for our global businesses, those  businesses
and  our  results of  operations may  be  adversely affected.

Regulatory  changes  outside  of  the United  States,  including in  Canada  and the European Union,

could adversely impact our results  of  operations and limit our growth.
that  are adopted  or  amended in  jurisdictions outside the U.S. may be more  restrictive than current laws
or regulations and may  result  in  lower  revenues and/or higher costs of compliance and thus could
materially and  adversely affect  our  results of operations  and limit our growth.

Insurance laws or regulations

In  particular,  the  European  Union’s  executive body, the European  Commission, implemented new
capital adequacy and risk  management  regulations called Solvency II  on January 1, 2016 that apply  to
the  Company’s businesses  across  the  European Union. Under Solvency II,  it is possible  that the U.S.
parent of  a  European  Union  subsidiary  could  be subject to certain  Solvency II requirements if the
regulator  determines that  the  subsidiary’s  capital position is dependent on the parent company and  the
U.S. parent is  not  already subject  to  regulations deemed ‘‘equivalent’’ to Solvency II. In addition,
regulators  in  countries  where  the  Company has operations are working with the International
Association of Insurance  Supervisors  (IAIS) (and  with the NAIC, the Federal Reserve and FIO in  the
U.S.)  to consider changes  to insurance  company supervision, including group supervision  and group
capital requirements.

The IAIS  has developed a  methodology for  identifying ‘‘global systemically important insurers’’

(G-SIIs)  and high level  policy  measures  that will apply to the G-SIIs. The methodology  and measures
were  endorsed  by  the Financial Stability  Board (FSB) created by the G-20.  Using  the IAIS
methodology,  the FSB, working with national authorities and the IAIS, identified nine insurers in
November  2016  that they  designated  as  G-SIIs.  The IAIS is working on  the policy measures which
include  higher  capital  requirements  and  enhanced supervision. The Company has not been designated
as a  G-SII by  the  FSB; however,  the  FSB updates the list annually, and it is possible that the
methodologies  could be  amended  or  interpreted differently in  the future and the Company could be
named  as  a  G-SII.

The IAIS  is also in  the process of  developing  the Common Framework for the Supervision of
Internationally  Active  Insurance Groups  (ComFrame). As the current draft of ComFrame  is completed,
it likely will lead  to  similar policy  measures as  those  being developed for G-SIIs  being made applicable
to internationally  active  insurance groups (or ‘‘IAIGs’’), including group supervision, group capital
requirements,  and  resolution  planning,  i.e., a written plan developed by a financial group detailing how
it would  be wound  down in  the event of  an insolvency. The IAIS  is  currently in the process of field
testing the  group capital  requirements.  The Company  would be considered an Internationally Active
Insurance Group  under the  current Consultation Draft. It is possible that ComFrame, if adopted, could
lead to  enhanced  supervision and higher  capital standards on a global basis if the IAIS,  the NAIC  and
the  individual  states  adopt the proposed  or  similar  provisions.

While it  is not yet  known how  or if these actions  will impact us, such regulation  could  result in

increased  costs  of compliance, increased  disclosure  and less flexibility in our  capital management, and
could adversely  impact  our  results of  operations and limit our growth.

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Loss of or  significant  restrictions  on the use  of particular types of underwriting criteria, such  as
credit  scoring, or  other  data or  methodologies, in the  pricing and underwriting of our products could
reduce  our future profitability. Our underwriting profitability  depends in  large part  on  our  ability to
competitively  price our products  at a  level that will  adequately compensate us for the risks assumed.  As
a  result, risk  selection  and pricing  through  the application of actuarially sound  and segmented
underwriting  criteria  is  critical.  However, laws  or  regulations, or judicial or administrative findings,
could significantly curtail  the  use of  particular  types of underwriting criteria.  For example,  we may use
credit  scoring  as  a factor  in  pricing  decisions  where allowed by state law.  Some consumer groups and/or
regulators  have alleged  that the use of  credit scoring violates the law by discriminating against persons
belonging to  a  protected  class  and are  calling  for the prohibition  or restrictions on the use of  credit
scoring in underwriting  and  pricing.  A  variety of other underwriting criteria and  other data  or
methodologies  used  in  personal  and  commercial insurance have been and continue to be criticized  by
regulators,  government agencies,  consumer  groups  or  individuals on similar or other grounds. Resulting
regulatory actions or  litigation could  result  in negative publicity and/or generate adverse rules or
findings, such as  curtailing  the  use  of  important  underwriting criteria, or other data or methodologies,
each  of  which could adversely  affect  our  future  profitability.

Acquisitions  and integration  of  acquired businesses may  result in operating difficulties and other
unintended  consequences. From  time  to time we may investigate  and pursue acquisition opportunities
if  we  believe that  such  opportunities  are  consistent with our  long-term objectives and that the potential
rewards of  an acquisition  justify  the risks. The process of integrating an acquired company  or business
can be  complex and  costly, however,  and may  create unforeseen operating  difficulties and expenditures.
For  example, acquisitions may present  significant  risks,  including:

• the  potential  disruption  of  our ongoing business;

• the  ineffective  integration  of, or other  difficulties  with,  underwriting, risk management, claims

handling, information  technology and actuarial practices;

• uncertainties  related to  an  acquiree’s reserve estimates and its design and operation  of internal

controls  over financial reporting;

• the  diversion of  management  time and resources to acquisition  integration challenges;

• the  loss of  key employees;

• unforeseen  liabilities;

• difficulties  in achieving the strategic  objectives of an acquisition, including the business, financial,

technological  or distribution objectives;

• the  cultural  challenges associated with  integrating employees; and

• the  impact on  our  financial position  and/or  credit  ratings.

Acquired businesses may  not perform as  projected, any  cost savings and other synergies anticipated

from  the  acquisition  may  not materialize and  costs associated with the integration may be greater than
anticipated. Acquired businesses may not be  successfully integrated, resulting in substantial costs or
delays and adversely affecting  our  ability to compete.  Accordingly, our results of operations might be
materially and  adversely affected.

We  could be  adversely affected if our  controls designed to ensure compliance with  guidelines,
policies  and legal  and  regulatory  standards are not effective. Our business is highly dependent  on  our
ability  to  engage  on  a daily  basis in a  large number of insurance underwriting,  claim processing and
investment activities,  many of  which are highly complex. These activities often are subject to  internal
guidelines and policies,  as  well as legal  and  regulatory standards. A control  system, no  matter how  well
designed  and operated,  can  provide only reasonable assurance  that the control system’s objectives will

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be  met.  If our  controls are  not effective,  it could lead to  financial loss, unanticipated risk exposure
(including underwriting, credit and  investment risk), errors in financial  reporting  or damage to our
reputation.  See  also ‘‘If we experience  difficulties  with technology, data and network security,
outsourcing  relationships, or  cloud-based technology, our  ability to conduct our business could be
negatively  impacted.’’

In  addition,  ineffective controls, including  with  respect to any joint ventures  or recently acquired

businesses, could  lead  to litigation  or  regulatory action. The volume of claims and amount of damages
and  penalties  claimed in litigation  and  regulatory proceedings against various types of financial
institutions have  increased  in  recent  years. Substantial  legal liability or significant regulatory action
against us  could  have  a  material  adverse financial impact.  See note 16 of  notes to our consolidated
financial statements  for  a  discussion  of  certain legal proceedings in which  we are involved.

Our businesses  may be  adversely affected if we are  unable to hire  and  retain qualified employees.

There is significant  competition from  within the  property and casualty insurance industry and from
businesses outside  the industry for  qualified  employees, especially those in key positions and those
possessing highly specialized knowledge  in areas  such  as underwriting, data  and analytics, technology
and  e-commerce. Our performance  is  largely  dependent  on the  talents, efforts and proper conduct  of
highly-skilled individuals,  including  our  senior executives  (many  of whom  have decades of experience in
the  insurance industry), and the Board  of Directors regularly  engages in succession discussions.  See
‘‘Item 10—Directors, Executive Officers  and Corporate Governance’’ for more information relating to
our executive  officers, including  our  senior leaders. For many of our  senior positions, we compete  for
talent  not just with  insurance  or  financial  service companies, but with other large companies and other
businesses. Our continued  ability  to compete  effectively in our  businesses  and to  expand into new
business  areas  depends on our  ability  to  attract new employees  and to retain and motivate our existing
employees. If  we  are  not  able  to successfully attract,  retain  and motivate our employees, our business,
financial results  and reputation could  be  materially  and adversely  affected.

Intellectual  property is  important to our business, and  we may be unable to protect and enforce

our  own  intellectual  property or we may be subject to claims for infringing the  intellectual property of
others. Our  success  depends  in part  upon our ability to protect our proprietary trademarks,
technology and other intellectual  property. See  ‘‘Item 1—Other Information—Intellectual Property.’’
We may not,  however, be  able  to protect our intellectual property from  unauthorized use and
disclosure by  others.  Further,  the  intellectual property laws may not prevent our competitors from
independently  developing  trademarks,  products  and services that are similar to ours. Moreover, the
agreements we  execute  to  protect our  intellectual property  rights may be breached, and we may  not
have  adequate remedies  in  response.  Our attempts to patent or register our intellectual property rights
in the  U.S. and worldwide  may  not succeed  initially or  may  later be challenged by  third parties.
Further,  the laws of certain countries  outside the  United  States may  not adequately protect our
intellectual property rights. We  may incur significant  costs in our efforts to protect and enforce our
intellectual property,  including  the initiation of  expensive and protracted litigation, and we may not
prevail.  Any inability to enforce our intellectual  property rights could have a material adverse effect  on
our business and our ability to compete.

We may  be subject to claims  by third parties from time to time that our products,  services and
technologies  infringe on their  intellectual property  rights. In recent years, certain entities have acquired
patents  in  order  to allege  claims of infringement against companies, including in some cases, us.  Any
intellectual property infringement  claims brought against us  could cause  us to spend significant time
and  money to  defend ourselves, regardless  of  the merits of the claims. If we are found  to infringe any
third-party intellectual property rights,  it  could result in reputational harm, payment of significant
monetary damages, payment of license  fees (if licenses  are even available to us, on reasonable terms  or
otherwise) and/or substantial time  and expense to redesign our products, services  or technologies to
avoid the infringement.  In  addition,  we  use third party  software in some of our products, services  and

67

technologies. If  any of  our  software  vendors or licensors are faced with infringement claims, we may
lose  our ability to use such  software  until the  dispute is resolved. If we cannot successfully redesign an
infringing product,  service  or  technology  (or procure a substitute version), this could have  a material
adverse effect  on  our business and  our  ability to compete.

Changes in federal  regulation could  impose  significant burdens on us and otherwise adversely
impact our results. The  Dodd-Frank  Wall Street Reform  and  Consumer  Protection Act  of 2010 (the
Dodd-Frank  Act)  established a  Federal  Insurance Office (FIO) within the U.S.  Department  of the
Treasury. The  FIO  has limited  regulatory authority and is  empowered to gather  data and information
regarding the insurance  industry  and  insurers, but it has in the past recommended an  expanded  federal
role in  some  circumstances.  The  Dodd-Frank Act also gives the Federal  Reserve supervisory authority
over a number  of  nonbank financial  services holding companies, including insurance companies, if they
are designated by a  two-thirds  vote  of  a  Financial Stability Oversight Council (the FSOC) as
‘‘systemically  important  financial institutions’’ (SIFI) or own a bank  or thrift. The Company, based
upon the FSOC’s rules  and interpretive  guidance, has not  been designated as a SIFI and is not subject
to regulation  by the  Federal Reserve.  Nonetheless, it is possible that FSOC  may change its rules or
interpretations in  the future  and  conclude  that we  are a SIFI. If we were  designated as a  SIFI, the
Federal Reserve’s supervisory  authority  could include the ability to impose  heightened financial
regulation  and  could impact  requirements regarding our capital, liquidity and leverage as  well as our
business and investment conduct.  The  Dodd-Frank Act also authorizes assessments  to pay for the
resolution of  SIFI’s  that  have  become  insolvent. We (as a financial company with more than $50 billion
in assets) could  be assessed,  and,  although any such assessment is required to be risk weighted
(i.e., riskier firms  pay more),  such  costs  could be material to us and are not currently estimable. As  a
result  of the foregoing,  the Dodd-Frank  Act, including any changes thereto as a result of  its  current  re-
evaluation or otherwise, or  other  additional federal regulation that is adopted in the  future, could
impose  additional  burdens  on  us, including impacting the ways  in which we conduct our business,
increasing compliance  costs and duplicating  state  regulation, and could  result in a  competitive
disadvantage, particularly  relative  to  other competitors that may not be  subject to the same  level of
regulation.

Even  if we are  not  subject to  additional regulation by the federal government, significant financial

sector  regulatory  reform,  could  have  a  significant  impact  on us. For example, regulatory reform could
have  an unexpected  impact on  our rights as a creditor or  on  our competitive position.

Other potential  changes  in U.S.  federal legislation, regulation and/or administrative policies,

including the  potential repeal  of  the  McCarran-Ferguson Act (which exempts insurance from most
federal  regulation)  and  potential changes in federal taxation, could also significantly harm the insurance
industry,  including  us.

Changes  to existing  U.S.  accounting standards may adversely impact our reported results. As a

U.S.-based SEC  registrant,  we are  currently required to prepare our financial statements in accordance
with U.S. Generally Accepted Accounting  Principles (U.S.  GAAP), as promulgated by  the Financial
Accounting Standards  Board  (FASB), subject to the  accounting rules and interpretations of the
Securities and  Exchange  Commission  (SEC). During  the last several years, the SEC  has been evaluating
whether, when and how  International Financial Reporting  Standards (IFRS) should be incorporated
into  the U.S. financial reporting system,  including for  companies  such as us. We are not able to predict
whether we will  choose,  or be  required,  to adopt IFRS  or  how the adoption of IFRS (or any  future
efforts by  the  SEC  to  converge U.S.  GAAP and  IFRS) may impact our financial statements in the
future. Changes  in U.S.  accounting  standards, particularly those that specifically apply  to property and
casualty  insurance company  operations,  may impact  the content and presentation of our reported
financial results  and could  cause  increased  volatility in reported earnings, resulting in other adverse
impacts on the  Company’s ratings and  cost of  capital,  and decrease the understandability of our
financial results  as well as the comparability of our reported results with other insurers.

68

Item 1B. UNRESOLVED  STAFF  COMMENTS

NONE.

Item 2. PROPERTIES

The Company leases  its principal  executive  offices in New York, New York, as well as

approximately 230  field  and  claim  offices  totaling approximately  4.5 million square feet  throughout  the
United States  under leases  or  subleases  with  third parties. The Company  also leases offices in Canada,
the  United Kingdom,  the Republic  of  Ireland, Brazil, India  and China that house operations (primarily
for Business  and  International  Insurance)  in  those  locations. The Company owns six buildings in
Hartford, Connecticut, consisting of  approximately  1.8  million square feet  of office space. The
Company  also  owns  buildings  located  in  other areas of Connecticut; Walnut Creek, California;
Norcross,  Georgia; St.  Paul, Minnesota;  and Omaha,  Nebraska. The Company owns a building in
London,  England,  which houses  a portion  of Business  and International Insurance’s  operations  in the
United Kingdom.

In  the opinion  of the  Company’s management, the Company’s properties  are adequate and  suitable

for its  business  as  presently  conducted  and are adequately maintained.

Item 3. LEGAL  PROCEEDINGS

The information  required  with  respect to this item can be found under ‘‘Contingencies’’ in note  16
of  notes  to the  consolidated  financial  statements in this annual report and is incorporated by reference
into  this Item 3.

Item 4. MINE  SAFETY  DISCLOSURES

NONE.

EXECUTIVE OFFICERS OF  THE REGISTRANT

Information about  the  Company’s executive officers  is  incorporated  by reference from Part III—

Item  10  of this  annual  report.

PART  II

Item 5. MARKET  FOR  REGISTRANT’S  COMMON  EQUITY, RELATED SHAREHOLDER

MATTERS AND  ISSUER PURCHASES OF EQUITY  SECURITIES

The Company’s  common stock  is traded on the New York Stock Exchange under the symbol
‘‘TRV.’’ The number  of  holders  of  record, including individual owners, of  the Company’s common stock
was 44,379 as  of  February  10,  2017.  This  is not the actual number of beneficial owners of the
Company’s common stock,  as  shares  are  held in ‘‘street name’’ by brokers and others on behalf of
individual owners.  The  following table  sets forth the high and low closing sales prices of the Company’s
common  stock  for each quarter  during  the last two  fiscal  years  and  the amount of cash dividends
declared  per share  each  quarter.

69

High

Low

Cash
Dividend
Declared

2016
First  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2015
First  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth  Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$117.43
119.04
119.29
122.57

$102.08
108.79
113.71
104.67

$109.73
108.67
107.82
115.83

$102.82
96.14
97.49
98.34

$0.61
0.67
0.67
0.67

$0.55
0.61
0.61
0.61

The Company paid cash  dividends  per share of $2.62  in 2016 and $2.38  in 2015. Future dividend

decisions  will be  based  on, and  affected  by,  a number of factors, including  the operating  results and
financial requirements of the Company  and the  impact of dividend restrictions. For information on
dividends,  as  well  as restrictions  on the  ability  of  certain of the Company’s subsidiaries to transfer  funds
to the Company  in the  form  of cash  dividends  or  otherwise, see ‘‘Item 7—Management’s Discussion
and  Analysis of  Financial Condition  and  Results of Operations—Liquidity and  Capital Resources.’’
Dividends  will be  paid  by the Company  only if declared by its Board of Directors out of funds legally
available, and  subject to  any other restrictions that may be applicable to the Company.

70

SHAREHOLDER  RETURN  PERFORMANCE  GRAPH

The following  graph  shows  a five-year  comparison of  the cumulative total return  to  shareholders

for the  Company’s  common stock  and  the common  stock of companies  included in  the  S&P  500 Index
and  the  S&P  500  Property &  Casualty  Insurance Index,  which  the Company  believes  is the most
appropriate  comparative  index.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN TO SHAREHOLDERS (1)

$250

$200

$150

$100

100.00

$50

$0

2011

209.92
210.57

177.01

192.43

192.25

174.60

243.65
232.80

198.18

160.90
166.10

153.57

124.72

120.11

116.00

2012

2013

2014

2015

2016

The Travelers Companies, Inc. (2)

S&P 500 Index

S&P 500 Property & Casualty Insurance Index (3)

9FEB201700443652

(1) The cumulative return  to shareholders is a concept used to compare  the performance  of a

company’s stock over  time and is the  ratio of the net  stock price change plus  the cumulative
amount of  dividends over the  specified time period (assuming  dividend reinvestment), to the stock
price at  the beginning of the time  period.

(2) Assumes  $100  invested  in common shares of The Travelers Companies, Inc. on December 31,

2011.

(3) Companies  in the  S&P 500  Property  & Casualty  Insurance Index as of December 31, 2016 were
the  following:  The  Travelers  Companies, Inc., Chubb Limited,  Cincinnati Financial Corporation,
The Progressive Corporation, The Allstate Corporation and XL Group Ltd.

Returns  of each of  the companies  included  in this index  have been weighted according to their
respective  market  capitalizations.

71

ISSUER  PURCHASES OF EQUITY SECURITIES

The table  below  sets forth information regarding repurchases  by the Company of its common  stock

during the periods  indicated.

Period Beginning

Period Ending

Total number
of shares
purchased

Average
price paid
per share

Total number  of
shares purchased
as part of
publicly announced
plans or programs

Approximate
dollar value of
shares  that may
yet be  purchased
under  the
plans or programs
(in millions)

Oct.  1, 2016
Nov.  1, 2016
Dec. 1, 2016

Oct.  31, 2016 . . . . . . . . . .
Nov. 30, 2016 . . . . . . . . . .
Dec.  31,  2016 . . . . . . . . . .

1,607,687
2,527,384
2,479,897

$108.80
111.05
119.13

Total

. . . . . . . . . . . . . . . . . . . . . . . . . .

6,614,968

113.53

1,606,400
2,520,473
2,479,050

6,605,923

$1,509
1,229
934

934

The Company’s  Board of Directors  has approved common  share  repurchase  authorizations  under

which repurchases  may be made  from  time to time  in the  open  market,  pursuant to pre-set  trading
plans  meeting the requirements of Rule 10b5-1 under the  Securities  Exchange Act  of 1934,  in private
transactions or  otherwise. The  authorizations  do  not have a stated expiration  date.  The  timing and
actual number  of  shares to  be repurchased in the future will  depend on a  variety of factors,  including
the  Company’s  financial  position, earnings, share price,  catastrophe  losses,  maintaining capital  levels
commensurate  with the  Company’s  desired  ratings from independent  rating agencies,  funding of  the
Company’s qualified  pension  plan, capital requirements of  the  Company’s operating subsidiaries, legal
requirements, regulatory constraints,  other  investment opportunities  (including mergers and  acquisitions
and  related financings),  market conditions and other  factors.

The Company  acquired 9,045  shares for  a total  cost  of approximately  $1  million during  the  three

months ended  December 31, 2016  that  were  not part of the  publicly announced share  repurchase
authorization. These shares  consisted  of  shares retained  to  cover  payroll withholding  taxes  in
connection with the  vesting  of restricted  stock  unit awards and  performance  share awards,  and  shares
used  by employees  to cover the  price  of  certain  stock options  that  were exercised.

Information  relating  to  compensation plans under which the  Company’s equity  securities  are

authorized for issuance is set  forth in  Part III—Item 12 of this  Report.

72

Item 6. SELECTED FINANCIAL  DATA

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . .

$ 27,625

2016

2015

At and for the year ended December  31,
2014
(in  millions, except  per share amounts)
$ 26,206
$ 27,174
$ 26,815

2013

2012

$ 25,756

Net  income . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,014

$

3,439

$

3,692

$

3,673

$ 2,473

Total  investments . . . . . . . . . . . . . . . . . . . . . .
Total  assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims  and claim  adjustment  expense  reserves .
Total  long-term  debt . . . . . . . . . . . . . . . . . . . .
Total  liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total  shareholders’  equity . . . . . . . . . . . . . . . .

$ 70,488
100,245
47,949
5,887
77,024
23,221

$ 70,470
100,184
48,295
5,844
76,586
23,598

$ 73,261
103,078
49,850
5,849
78,242
24,836

$ 73,160
103,812
50,895
6,246
79,016
24,796

$ 73,838
104,938
50,922
5,750
79,533
25,405

Net income  per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year-end common  shares outstanding . . . . . . .

Per  common share amounts
Cash  dividends . . . . . . . . . . . . . . . . . . . . . . . .

Book  value . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

$

$

10.39

10.28

279.6

2.62

83.05

$

$

$

$

10.99

10.88

295.9

2.38

79.75

$

$

$

$

10.82

10.70

322.2

2.15

77.08

$

$

$

$

9.84

9.74

$

$

6.35

6.30

353.5

377.4

1.96

$

1.79

70.15

$ 67.31

73

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS  OF OPERATIONS

The following  is  a discussion  and  analysis of  the Company’s financial  condition and  results of

operations.

FINANCIAL  HIGHLIGHTS

2016 Consolidated  Results  of  Operations

• Net  income  of  $3.01 billion,  or  $10.39  per share  basic and $10.28 per share diluted

• Net  earned premiums  of  $24.53  billion

• Catastrophe  losses of  $877 million ($576 million after-tax)

• Net  favorable prior year reserve  development of $771 million ($510 million after-tax)

• Combined  ratio  of  92.0%

• Net  investment  income of  $2.30  billion  ($1.85 billion  after-tax)

• Operating cash flows of $4.20 billion

2016 Consolidated  Financial Condition

• Total investments of $70.49  billion; fixed  maturities and short-term securities comprise 93% of

total investments

• Total assets  of  $100.25 billion

• Total debt  of  $6.44 billion,  resulting in a debt-to-total capital ratio  of 21.7% (22.3%  excluding

net  unrealized  investment  gains,  net of tax)

• Repurchased  21.9  million  common  shares for total cost of  $2.47 billion and  paid  $757 million  of

dividends  to  shareholders

• Shareholders’ equity of $23.22  billion

• Net  unrealized  investment  gains  of  $1.11 billion ($730 million  after-tax)

• Book value  per  common  share of  $83.05

• Holding  company  liquidity  of  $1.68 billion

74

CONSOLIDATED  OVERVIEW

Consolidated  Results  of Operations

(for the year ended December 31, in  millions except per  share  amounts)

2016

2015

2014

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,534
2,302
458
68
263

$23,874
2,379
460
3
99

$23,713
2,787
450
79
145

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,625

26,815

27,174

Claims  and expenses
Claims  and claim  adjustment  expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization  of  deferred  acquisition  costs . . . . . . . . . . . . . . . . . . . . . . .
General and  administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total claims and  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income  before income  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,070
3,985
4,154
363

23,572

4,053
1,039

13,723
3,885
4,094
373

22,075

4,740
1,301

13,870
3,882
3,964
369

22,085

5,089
1,397

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,014

$ 3,439

$ 3,692

Net income  per share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10.39

$ 10.99

$ 10.82

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10.28

$ 10.88

$ 10.70

Combined  ratio

Loss and loss  adjustment  expense ratio . . . . . . . . . . . . . . . . . . . . . . .
Underwriting  expense  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Combined  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60.5%
31.5

92.0%

56.6% 57.6%
31.7

31.4

88.3% 89.0%

Incremental  impact  of  direct to consumer initiative  on  combined

ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.3%

0.5%

0.6%

The following  discussions of the Company’s net  income and segment operating income are
presented on  an after-tax  basis.  Discussions of the components of net income and segment operating
income  are presented on a  pre-tax  basis,  unless otherwise noted. Discussions of earnings per common
share  are presented  on  a diluted basis.

Overview

Diluted net  income  per share  of $10.28  in 2016 decreased  by 6% from diluted net income per
share  of  $10.88 in  2015.  Net  income  of  $3.01  billion  in 2016 decreased by 12% from  net income of
$3.44  billion  in 2015.  The  lower rate  of  decrease in diluted net income per share reflected  the impact
of  share  repurchases  in recent periods.  The  decrease in net income primarily reflected the pre-tax
impacts of (i) higher  catastrophe losses,  (ii)  lower underwriting margins excluding catastrophe losses
and  prior  year  reserve development (‘‘underlying underwriting margins’’),  (iii) lower net favorable prior
year reserve development and (iv) lower  net  investment  income, partially offset by (v) higher other
revenues  and  (vi)  higher net realized investment  gains. Catastrophe losses in 2016 and 2015 were
$877 million  and  $514  million, respectively.  Net  favorable prior year reserve development in 2016 and
2015 was $771  million  and $941  million,  respectively. The lower underlying underwriting margins

75

primarily  resulted  from  (i) higher loss  estimates  in the  personal automobile product line for bodily
injury liability  coverages, (ii)  the  impact  of loss  cost trends that modestly exceeded  earned pricing in
Business and  International Insurance  and  (iii) higher general and administrative expenses. Partially
offsetting  this  net  pre-tax decrease  in  income was  a  related decrease in income tax expense.

Diluted net  income  per share  of $10.88 in  2015  increased by 2% over diluted net income per  share

of  $10.70  in  2014.  Net  income of  $3.44  billion  in 2015 decreased  by 7% from net income of
$3.69  billion  in 2014.  The  percentage  increase in  diluted  net income per share compared with the
percentage decrease  in net  income  reflected the  impact of share repurchases in recent periods.  The
decrease in net  income  primarily  reflected  the pre-tax impacts of (i) lower net investment  income,
(ii) lower net realized  investment  gains,  (iii) a decline in other revenues and (iv) slightly lower
underlying underwriting  margins, partially offset by (v) lower catastrophe  losses. Catastrophe losses  in
2015 and  2014  were  $514  million  and  $709 million, respectively. Net favorable prior year reserve
development in  both 2015  and  2014  was  $941 million. Partially offsetting this net pre-tax decrease in
income  was  a  related  decrease  in  income tax expense.  In addition, income  tax expense in 2015 was
reduced by  $32  million as a  result of  the  resolution of prior  year tax  matters.

The Company has  insurance  operations  in Canada, the United Kingdom  and the Republic of
Ireland, as well as in Brazil, primarily through a joint  venture. Because these operations are conducted
in local currencies  other  than the U.S.  dollar, the  Company is subject to  changes in foreign currency
exchange rates.  For the years  ended  December  31,  2016, 2015 and 2014, changes in foreign  currency
exchange rates had  the impact  of  lowering  the reported line items in the statement of income by
insignificant  amounts.  The  impact  of  these changes  was not material to the Company’s net income or
Business and  International Insurance’s  operating income for the years reported.

Revenues

Earned Premiums

Earned  premiums in  2016  were  $24.53 billion, $660 million or 3% higher  than in 2015. In Business
and  International  Insurance,  earned  premiums in  2016  increased  by 1%  over 2015. In Bond  & Specialty
Insurance,  earned  premiums in  2016  were comparable  to 2015. In Personal Insurance, earned premiums
in 2016  increased by  8% over  2015. Earned premiums  in 2015 were $23.87 billion,  $161  million or  1%
higher  than in  2014.  In each  of Business  and  International Insurance and Bond & Specialty Insurance,
earned  premiums in  2015  were comparable  to 2014. In  Personal Insurance, earned premiums in 2015
increased  by 2%  over 2014.

Factors contributing to the  changes in earned premiums  in  each segment in 2016  and 2015
compared with  the  respective  prior year  are  discussed in  more detail in the segment discussions that
follow.

Net Investment  Income

The following  table  sets forth information regarding  the Company’s investments.

(for the year ended December 31, in  millions)

2016

2015

2014

Average investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax  net investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After-tax net investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average pre-tax  yield(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average after-tax yield(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$70,246
2,302
1,846

$70,627
2,379
1,905

$72,049
2,787
2,216

3.3%
2.6%

3.4%
2.7%

3.9%
3.1%

(1) Excludes net  unrealized  investment  gains  and losses and reflects  cash, receivables for investment

sales,  payables  on  investment  purchases and  accrued investment income.

(2) Excludes net  realized  and net  unrealized  investment gains and losses.

76

Net  investment  income  in 2016  was  $2.30  billion, $77  million or 3% lower than in 2015.  Net

investment income from  fixed  maturity  investments  in 2016 was $1.98 billion, $110 million lower than in
2015.  The  decrease primarily resulted  from lower long-term reinvestment rates available in the market
and  a  modestly  lower  amount  of fixed  income investments that were impacted by the Company’s
$524 million  payment  related to  the  settlement of the PPG Industries,  Inc. litigation in  the second
quarter  of  2016.  Net  investment income  from short-term securities in 2016 was  $29 million, $17 million
higher  than in  2015,  primarily  due to  higher short-term interest rates. Net  investment income generated
by  non-fixed maturity  investments  in 2016 was $330 million, $13 million  higher  than  in 2015, primarily
due to higher returns from  private equity limited partnerships, partially offset by lower returns from
real estate  partnerships.

Net  investment  income  in 2015  was  $2.38  billion, $408 million or 15% lower than in 2014.

Investment  income from  fixed maturity  investments in  2015 was $2.09 billion, $153 million lower than
in 2014.  The  decrease  primarily resulted  from  lower  long-term reinvestment rates available in  the
market and a modestly lower  amount  of  fixed income investments that were impacted by the
Company’s $579 million  payment in  the  first  quarter of 2015 related to the settlement of the Asbestos
Direct  Action Litigation.  Investment income  generated by non-fixed maturity investments in  2015 was
$317 million, $256 million lower  than  in  2014  primarily due to lower returns from private equity limited
partnerships and  hedge  fund  investments. Returns  from  private equity limited partnerships in  2015 were
impacted  by lower  valuations  for energy-related investments.

Fee Income

The National Accounts  market in  Business and International  Insurance is the primary  source  of
the  Company’s fee-based  business.  Fee  income is described  in more detail in Business and International
Insurance discussion  that follows.

Net Realized Investment Gains

The following  table  sets forth information regarding  the Company’s net pre-tax realized investment

gains.

(for the year ended December 31, in  millions)

Net Realized  Investment  Gains

2016

2015

2014

Other-than-temporary  impairment  losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  net realized investment  gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(29) $(52) $(26)
105
55

97

Net realized  investment  gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 68

$ 3

$ 79

Other  Net  Realized  Investment  Gains

Other  net realized investment gains  in 2016 included $59 million of net realized gains related to

fixed  maturity investments, $14 million  of net realized investment gains related to equity securities,
$7 million of  net realized  investment  gains from real estate sales and $17 million of net realized
investment gains related  to  other  investments.

Other  net realized investment gains  in 2015 included $81 million of net realized gains related to

fixed  maturity investments, $6  million  of  net  realized investment gains  related to equity securities,
$2 million of  net realized  investment  gains from real estate sales and $34 million of net realized
investment losses related to  other investments. The net  realized investment losses related to other
investments included  $26 million of realized  foreign  exchange translation losses incurred in connection
with the  Company’s  increased  ownership  of Travelers  Participa¸c˜oes em Seguros Brasil S.A.

77

Other  net realized investment  gains in 2014 included  $35 million of net realized gains resulting
from  the  sale  of substantially  all  of one  of the Company’s real estate joint venture investments. The
remaining  $70  million of  other net  realized gains  in 2014 were primarily driven  by $32 million of net
realized investment gains  related to  fixed maturity investments, $24 million of net realized investment
gains related to equity  securities,  $8  million of net  realized investment gains related to other
investments and  $6  million of  net realized investment gains from other  real estate sales.

Other  Revenues

Other  revenues  in all years  presented included installment premium charges. Other  revenues in

2016 also included a  $126  million  gain  related  to  the favorable settlement of a reinsurance dispute
(discussed  in  more  detail  in note  16 of  notes to  the consolidated  financial statements),  as well as
proceeds from  the  favorable settlement  of a claims-related legal matter. Other  revenues in  2014 also
included  revenues  associated  with  the  runoff  of  the Company’s National Flood Insurance Program
(NFIP) business  that  was  sold  on a renewal rights basis in 2013.

Claims  and Expenses

Claims and Claim Adjustment Expenses

Claims  and claim  adjustment  expenses in 2016 were  $15.07 billion, $1.35 billion  or 10% higher
than in 2015, primarily reflecting the  impacts  of  (i) higher volumes of insured exposures, (ii) loss cost
trends, (iii) higher  catastrophe  losses,  (iv) lower  net favorable  prior year reserve development and
(v) higher loss  estimates in the personal  automobile product line for bodily injury  liability coverages,
partially  offset by (vi)  lower levels of  what  the Company defines as  large  losses. Catastrophe losses  in
2016 included losses  from  Hurricane  Matthew,  wind and  hail storms in several regions of the  United
States, flooding in  the Southeast  region  of the  United States, wildfires in Canada and  Tennessee, and
winter  storms  in  the eastern United States.

Claims  and claim  adjustment  expenses in 2015 were  $13.72 billion, $147 million  or 1% lower  than
in 2014,  primarily  reflecting  the impacts  of (i) lower catastrophe losses and (ii) lower non-catastrophe
weather-related  losses,  partially  offset  by (iii)  loss cost  trends. Catastrophe losses in 2015 included
wildfires  in  California,  hail and  wind  storms  in several regions of the United States and winter storms
in several  regions  of the  United States.  Catastrophe  losses in  2014  included multiple wind and hail
storms in several  regions of  the  United  States and a  winter storm in  the Mid-Atlantic, Midwestern and
Southeastern regions of  the United States.

Factors contributing to net  favorable prior  year  reserve development  in each segment  for the  years

ended  December 31,  2016,  2015  and  2014 are discussed  in more detail in note  7 of notes  to the
consolidated  financial  statements.

Significant  Catastrophe  Losses

The Company defines a  ‘‘catastrophe’’ as an  event that:

• is designated a  catastrophe  by internationally recognized organizations that track and report on
insured  losses  resulting  from  catastrophic events, such as Property  Claim  Services  (PCS)  for
events in  the United  States  and Canada; and

• the  Company’s estimates  of  its  ultimate losses before reinsurance and taxes exceed a

pre-established  dollar threshold.

The Company’s threshold for disclosing  catastrophes is determined at the  reportable segment level.

If a threshold  for  one segment or a combination  thereof is exceeded and the other segments have
losses from the same  event,  losses from the  event  are  identified as catastrophe losses in the  segment
results  and for  the consolidated results  of the Company. The  threshold  for 2016 ranged from
approximately $17  million  to  $30 million  of  losses  before reinsurance and taxes.

78

The following  table  presents the  amount  of  losses recorded by  the Company for significant
catastrophes  that  occurred  in 2016,  2015 and 2014, the  amount of related net unfavorable (favorable)
prior year  reserve  development  recognized  in  subsequent  years, and the estimate of ultimate losses  for
those  catastrophes  at  December 31, 2016,  2015  and  2014. For purposes of the table,  a significant
catastrophe  is  an event  for which  the  Company estimates its ultimate losses will be $100 million  or
more  after reinsurance and  before  taxes.

(in millions, pre-tax and net of reinsurance)

2014
PCS  Serial Number:

Losses Incurred /
Unfavorable  (Favorable)
Prior Year Reserve
Development for the Year
Ended December 31,
2015

2014

2016

Estimated Ultimate
Losses at  December  31,
2014
2015
2016

32—Winter  storm . . . . . . . . . . . . . . . . . . . . . . . . . .
43—Severe  wind  and  hail storms . . . . . . . . . . . . . . .

$ (1)
5

$ (5)
(4)

$144
180

$138
181

$139
176

$144
180

2015
PCS  Serial Number:

68—Winter  storm . . . . . . . . . . . . . . . . . . . . . . . . . .

(11)

140

n/a

129

140

n/a

2016
PCS  Serial Number:

21—Severe  wind and hail  storms . . . . . . . . . . . . . . .
25—Severe  wind and hail  storms . . . . . . . . . . . . . . .

150
168

n/a
n/a

n/a
n/a

150
168

n/a
n/a

n/a
n/a

n/a: not applicable.

Amortization  of  Deferred  Acquisition  Costs

Amortization  of  deferred  acquisition  costs in 2016 was $3.99 billion,  $100  million or  3% higher
than in 2015. Amortization  of  deferred  acquisition costs in 2015  was $3.89 billion, comparable with
2014.  Amortization of deferred  acquisition costs is discussed in more detail in the segment discussions
that  follow.

General  and Administrative  Expenses

General and  administrative expenses in  2016  were $4.15  billion, $60  million or 1% higher than in
2015.  General  and administrative  expenses  in 2015 were $4.09 billion, $130 million or 3% higher than
in 2014.  The  increase  in  2015 primarily  reflected the impact of a $76 million first quarter 2014
reduction in  the  estimated liability  for  state  assessments related to  workers’ compensation premiums.
General and  administrative expenses  are discussed in more detail  in the segment discussions that
follow.

Interest  Expense

Interest expense in  2016,  2015  and 2014 was $363 million, $373 million and $369 million,

respectively.

Income Tax  Expense

Income tax expense  in 2016  was $1.04  billion, $262 million or 20% lower than in 2015, primarily
reflecting the  impact  of the  $687 million decrease  in income before income taxes  in 2016. Income tax
expense in 2015 was  $1.30  billion, $96 million or 7% lower than in 2014, primarily reflecting the impact

79

of  the $349  million  decrease  in income  before income taxes in 2015 and the $32 million  reduction in
income  tax expense in 2015 resulting  from the  resolution of prior year tax  matters.

The Company’s  effective tax rate  was  26%, 27% and 27% in  2016, 2015 and 2014, respectively.

The effective tax rates in  all  years  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.

Combined  Ratio

The combined ratio  of 92.0%  in 2016 was  3.7  points  higher than the combined ratio of 88.3%  in

2015.

The loss and  loss  adjustment  expense  ratio of 60.5% in  2016 was 3.9 points higher than the  loss

and  loss adjustment  expense ratio  of  56.6% in the  same period of 2015.  Catastrophe losses accounted
for 3.6  points  and 2.1 points of  the 2016  and 2015 loss and loss adjustment expense ratios,  respectively.
Net  favorable prior  year reserve development  in 2016 and 2015 provided 3.2 points and 3.9 points  of
benefit,  respectively, to  the  loss  and loss  adjustment expense ratio. The  loss and loss adjustment
expense ratio  excluding  catastrophe losses and prior year reserve development (‘‘underlying loss  and
loss adjustment expense  ratio’’) in  2016  was 1.7 points higher than the 2015 ratio on the  same basis,
primarily  reflecting  (i) higher  loss  estimates  in the personal automobile product line  for bodily  injury
liability  coverages and  (ii) the  impact  of  loss cost trends that modestly exceeded earned pricing in
Business and  International Insurance,  partially offset by  (iii) lower levels of what the Company defines
as large losses.

The underwriting expense ratio of  31.5%  was  0.2  points lower than  the underwriting expense  ratio

of  31.7%  in  2015.

The combined ratio  of 88.3%  in 2015 was  0.7  points  lower than the  combined ratio of 89.0% in

2014.

The loss and  loss  adjustment  expense  ratio of 56.6% in  2015 was 1.0 points lower than the loss and

loss adjustment expense  ratio  of 57.6%  in 2014.  Catastrophe losses accounted for 2.1 points and 3.0
points  of  the  2015  and  2014  loss and  loss adjustment expense ratios, respectively. Net favorable prior
year reserve development  in 2015  and  2014  provided 3.9 points of benefit to the loss  and loss
adjustment  expense  ratio in  each  year.  The underlying loss and loss adjustment expense ratio in  2015
was 0.1  points lower  than  the  2014 ratio  on the  same basis.

The underwriting expense ratio of  31.7%  in 2015 was 0.3 points higher than the underwriting
expense ratio  of  31.4% in  2014, primarily  reflecting the impact of the first quarter 2014 reduction in
the  estimated liability for  state  assessments  to be  paid by the Company related to workers’
compensation  premiums  in Business  and International  Insurance.

Written  Premiums

Consolidated gross and  net written  premiums were  as follows:

(for the year ended December 31, in  millions)

Gross Written  Premiums
2015

2014

2016

Business and International Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond &  Specialty  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$16,036
2,183
8,276

$16,067
2,153
7,562

$16,202
2,165
7,265

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,495

$25,782

$25,632

80

(for the year ended December 31, in  millions)

Net Written Premiums
2015

2014

2016

Business and  International Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond &  Specialty  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,675
2,099
8,184

$14,583
2,081
7,457

$14,636
2,103
7,165

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,958

$24,121

$23,904

Gross  and  net written premiums  in 2016  both increased by 3% over 2015. Gross and net  written
premiums in 2015 both  increased by  1%  over  2014. Factors contributing to the  changes in gross and net
written  premiums  in each segment  in  2016  and 2015 as  compared with the  respective prior year are
discussed in  more detail in the  segment  discussions that  follow.

RESULTS OF OPERATIONS BY  SEGMENT

Business  and  International  Insurance

Results  of  Business and International Insurance  were as follows:

(for the year ended December 31, in  millions)

2016

2015

2014

Revenues:

Earned  premiums . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . .
Fee  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,620
1,763
442
176

$14,521
1,824
445
23

$14,512
2,156
438
46

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,001

$16,813

$17,152

Total  claims and  expenses . . . . . . . . . . . . . . . . . . . .

$14,294

$13,874

$14,007

Operating  income . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,048

$ 2,170

$ 2,347

Loss  and  loss adjustment  expense ratio . . . . . . . . . . .
Underwriting  expense  ratio . . . . . . . . . . . . . . . . . . . .

Combined  ratio . . . . . . . . . . . . . . . . . . . . . . . . .

61.4%
32.9

94.3%

59.6%
32.5

92.1%

61.6%
31.5

93.1%

Overview

Operating  income  in 2016 was  $2.05  billion, $122 million or  6% lower than operating income of

$2.17  billion  in 2015,  primarily reflecting the  pre-tax  impacts of (i) higher catastrophe losses, (ii) lower
underlying underwriting  margins and  (iii) lower net investment income,  partially offset by (iv) higher
other  revenues and (v) higher  net favorable prior year reserve development. Catastrophe losses in  2016
and  2015  were $512  million  and $247  million,  respectively. Net favorable prior  year reserve
development in  2016 and  2015 was  $484 million and $405 million, respectively.  The lower underlying
underwriting margins  primarily  resulted  from (i) the  impact of loss cost trends that modestly exceeded
earned  pricing  and (ii) higher general  and administrative expenses, partially offset by (iii) lower levels
of  what the Company defines as large losses.  Partially  offsetting this net  pre-tax decrease in operating
income  was  a related  decrease  in  income tax expense.

Operating  income  in 2015 was  $2.17  billion, $177 million or  8% lower than operating income of
$2.35  billion  in 2014,  primarily reflecting the  pre-tax  impacts of (i) lower net investment income and
(ii) lower underlying underwriting  margins, partially offset  by (iii) lower catastrophe losses and
(iv)  higher net  favorable prior year reserve  development. Catastrophe losses in 2015 and 2014 were
$247 million  and  $367  million, respectively.  Net  favorable prior year reserve development in 2015  and
2014 was $405  million  and $322  million,  respectively. The lower underlying underwriting margins

81

primarily  resulted  from  the pre-tax impact of a 2014 reduction in  the estimated liability for state
assessments to  be  paid  by the  Company  related to  workers’  compensation premiums, partially offset by
lower non-catastrophe weather-related  losses.  Partially offsetting  this net pre-tax  decrease  in income
was a  related  decrease  in  income  tax  expense.  In addition, income tax expense in 2015 was reduced by
$12 million as  a  result  of  the  resolution  of prior  year  tax matters.

Revenues

Earned Premiums

Earned  premiums of $14.62  billion  in 2016 were $99 million or 1% higher than in  2015. Earned

premiums of $14.52  billion in  2015 were  comparable to 2014.

Net Investment  Income

Net  investment  income  in 2016  was  $1.76  billion, $61  million or 3% lower than in 2015.  Net
investment income in  2015 was  $1.82  billion,  $332 million or 15% lower than in 2014. Included in
Business and  International Insurance  are  certain legal  entities whose invested assets and related net
investment income are reported  exclusively in this segment and not allocated among all business
segments. Refer  to  the ‘‘Net  Investment  Income’’ section of the  ‘‘Consolidated  Results of Operations’’
discussion for  a description of  the  factors contributing to the declines in the  Company’s  consolidated
net  investment  income  in 2016 and  2015 compared  with the respective prior years. In addition, refer  to
note  2  of  notes  to the  consolidated financial statements for a  discussion of the Company’s net
investment income allocation  methodology.

Fee Income

National  Accounts  is  the  primary  source of fee  income  due to its  service businesses, which include

claim and  loss prevention  services to  large  companies  that choose to  self-insure a portion of their
insurance risks,  as  well as claims  and  policy management services to workers’ compensation residual
market pools.  Fee income in  2016  was  $442 million, 1%  lower than in 2015. Fee income in 2015 was
$445 million, $7  million  or  2% higher  than in 2014. The increase in 2015 primarily reflected higher
serviced  premium  volume in  workers’  compensation residual market pools and higher claim volume in
the  large deductible business.

Other  Revenues

Other  revenues  in 2016  included  a  $126 million gain related to the favorable settlement of a

reinsurance dispute  (discussed  in  more  detail in note 16  of notes  to the consolidated  financial
statements), as well  as  proceeds  from  a  favorable settlement of a claims-related legal matter.

Claims  and Expenses

Claims and Claim Adjustment Expenses

Claims  and claim  adjustment  expenses in 2016 were  $9.19 billion, $331 million or 4% higher than

in 2015,  primarily  reflecting  the impacts  of (i) loss cost trends and (ii) higher catastrophe losses,
partially  offset by (iii)  lower levels of  what  the Company defines as  large  losses and (iv) higher net
favorable prior  year reserve development. Claims  and claim adjustment expenses  in 2015 were
$8.86  billion, $286 million or  3% lower  than in  2014, primarily reflecting the impacts of (i) lower
catastrophe  losses, (ii) higher  net favorable prior year reserve development and (iii) lower
non-catastrophe weather-related losses, partially  offset  by (iv) the impact of loss cost trends. Factors
contributing to  net  favorable  prior  year  reserve  development during the years ended  December 31,

82

2016,  2015 and 2014  are  discussed in  more detail in  note 7 of notes to the consolidated financial
statements.

Amortization  of  Deferred  Acquisition  Costs

Amortization  of  deferred  acquisition  costs in 2016 was $2.36 billion,  $29 million or 1% higher than

in 2015.  Amortization  of deferred  acquisition costs  of  $2.33 billion in 2015  was comparable to 2014.

General  and Administrative  Expenses

General and  administrative expenses in  2016  were $2.75  billion, $60  million or 2% higher than in

2015,  primarily reflecting  higher  employee and technology related expenses. General and administrative
expenses in 2015  were  $2.69  billion,  $145 million or 6%  higher than in 2014, primarily reflecting the
impacts of the 2014 reduction  in  the estimated liability for state assessments to be paid by the
Company  related  to workers’  compensation premiums, higher employee and  technology  related
expenses and  higher contingent commissions.

Income Tax  Expense

Income tax expense in 2016 was $659 million, $110 million or 14% lower than in 2015, primarily
reflecting the  $232  million  decrease  in  income before income  taxes in 2016. Income tax expense in 2015
was $769 million,  $29  million  or 4%  lower than in 2014, primarily reflecting the $206 million  decrease
in income  before  income taxes in  2015  and  the $12 million reduction in  income  tax expense in 2015
resulting from the  resolution  of  prior  year tax matters.

Combined  Ratio

The combined ratio  of 94.3%  in 2016 was  2.2  points  higher than the combined ratio of 92.1%  in

2015.

The loss and  loss  adjustment  expense  ratio of 61.4% in  2016 was 1.8 points higher than the  loss
and  loss adjustment  expense ratio  of  59.6% in 2015. Catastrophe losses in 2016 and  2015 accounted for
3.5  points  and  1.7  points,  respectively,  of the loss  and loss adjustment expense ratio. Net favorable prior
year reserve development  in 2016  and  2015  provided 3.3 points and 2.8  points of benefit, respectively,
to the loss  and  loss adjustment  expense  ratio.  The underlying loss  and loss adjustment  expense ratio  in
2016 was 0.5  points  higher  than  the  2015  ratio on  the same basis.

The underwriting expense ratio of  32.9%  in 2016 was 0.4 points higher than the underwriting

expense ratio  of  32.5% in  2015.

The combined ratio  of 92.1%  in 2015 was  1.0  point lower than the combined ratio of  93.1% in

2014.

The loss and  loss  adjustment  expense  ratio of 59.6% in  2015 was 2.0 points lower than the loss and

loss adjustment expense  ratio of 61.6% in 2014.  Catastrophe losses in 2015 and 2014 accounted for 1.7
points  and  2.5  points, respectively, of the loss  and loss adjustment  expense ratio. Net favorable prior
year reserve development in 2015 and 2014  provided 2.8 points and 2.2  points of benefit, respectively,
to the loss  and  loss adjustment expense  ratio.  The 2015 underlying loss  and loss adjustment expense
ratio was  0.6  points  lower than the  2014  ratio on  the same basis.

The underwriting expense ratio of  32.5%  in 2015 was 1.0 point higher than the underwriting
expense ratio  of  31.5% in  2014, primarily  reflecting the impact of the 2014 reduction in the  estimated
liability  for state assessments to be paid  by the Company related to workers’ compensation premiums
and  the  increase  in general and  administrative expenses  discussed above.

83

Written  Premiums

Business and  International Insurance’s gross and net  written premiums by market  were as follows:

(for the year ended December 31, in  millions)

Domestic:

Gross Written Premiums
2015

2014

2016

Select  Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle  Market . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National  Accounts . . . . . . . . . . . . . . . . . . . . . . . . .
First  Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized  Distribution . . . . . . . . . . . . . . . . . . . . .

Total  Domestic . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,792
6,716
1,683
1,866
1,098

14,155
1,881

$ 2,773
6,587
1,725
1,844
1,117

14,046
2,021

$ 2,754
6,404
1,690
1,846
1,081

13,775
2,427

Total  Business  and  International Insurance . . . . .

$16,036

$16,067

$16,202

(for the year ended December 31, in  millions)

Domestic:

Net Written Premiums
2015

2014

2016

Select  Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle  Market . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National  Accounts . . . . . . . . . . . . . . . . . . . . . . . . .
First  Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized  Distribution . . . . . . . . . . . . . . . . . . . . .

Total  Domestic . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,729
6,463
1,058
1,601
1,094

12,945
1,730

$ 2,716
6,302
1,048
1,564
1,111

12,741
1,842

$ 2,707
6,077
1,047
1,579
1,074

12,484
2,152

Total  Business  and  International Insurance . . . . .

$14,675

$14,583

$14,636

Gross  written  premiums  in 2016 were comparable with 2015. Net written  premiums in 2016
increased  by 1%  over 2015.  Business  retention rates remained strong in 2016. Renewal  premium
changes  in 2016  remained  positive  but  were lower  than  in 2015. New business premiums in 2016
increased  over 2015.

Gross  written  premiums  in 2015 were 1%  lower than  in 2014. Net written premiums in 2015 were
comparable to 2014. Gross  and net  written premiums in  2015 were negatively  impacted by changes  in
foreign  currency  exchange rates. Business  retention rates  remained strong in 2015.  Renewal premium
changes  in 2015  remained  positive  but  were lower  than  in 2014. New business premiums in 2015
decreased from 2014.

Select  Accounts. Net  written  premiums of $2.73 billion  in 2016 were comparable with 2015.
Business retention  rates remained  strong in 2016. Renewal premium changes in 2016 remained positive
but  were  lower  than in  2015. New  business premiums in 2016 increased over 2015. Net written
premiums  of $2.72  billion  in 2015  were  comparable to  2014. Business retention rates  remained strong
in 2015. Renewal premium  changes  in  2015  remained  positive but were lower than in 2014. New
business premiums  in 2015  were comparable to 2014.

Middle Market. Net  written  premiums of $6.46  billion in  2016  increased by  3%  over 2015.

Business retention rates  remained strong in  2016. Renewal premium  changes  in 2016 remained  positive
but  were slightly lower than in 2015.  New business premiums in 2016 increased  over 2015.  Net  written
premiums of  $6.30 billion  in  2015  increased  by 4%  over  2014. Business retention  rates remained  strong

84

in 2015.  Renewal premium  changes  in  2015 remained positive but were lower than in 2014. New
business  premiums  in  2015  increased  over  2014.

National  Accounts. Net  written  premiums of $1.06  billion in  2016  increased by  1%  over 2015.
Business retention rates  remained  strong in 2016. Renewal premium changes in 2016 remained positive
but  were  lower than  in 2015.  New  business premiums in  2016 increased over 2015. Net written
premiums  of  $1.05  billion  in  2015  were  comparable  to 2014. Business retention rates  remained strong
in 2015. Renewal  premium changes  in  2015 remained positive but were slightly lower than  in 2014.  New
business premiums  in  2015  increased  over 2014.

First  Party. Net  written  premiums of $1.60 billion in 2016 increased by  2%  over  2015. Business

retention rates remained  strong  in  2016.  Renewal premium changes in 2016  were zero, compared  with
slightly negative in  2015. New  business  premiums in 2016 increased  over 2015. Net written  premiums  of
$1.56  billion in 2015 decreased by 1%  from 2014. Business retention rates remained strong in 2015.
Renewal  premium  changes  in 2015  were  negative, compared with positive renewal premium changes  in
2014.  New business premiums  in 2015  decreased  from 2014.

Specialized  Distribution. Net  written premiums of $1.09 billion  in 2016 decreased by 2% from
2015.  Business  retention  rates in  2016  were  lower  than in  2015. Renewal premium  changes  in 2016
remained  positive  but were lower than  in  2015. New business premiums in 2016 decreased slightly from
2015.  Net  written premiums of  $1.11  billion  in 2015 increased  by 3%  over  2014.  Business retention
rates  remained  strong in  2015. Renewal  premium changes  in 2015 remained  positive  but were lower
than in 2014.  New  business  premiums  in 2015 increased over 2014.

International. Net  written  premiums of $1.73 billion  in 2016 decreased by 6% from 2015. The
decline in 2016 was  primarily  driven by  the impacts of changes in  foreign currency exchange rates,
disciplined underwriting and  lower  levels  of  economic activity  in  the Company’s European operations,
including Lloyd’s.  Excluding the  surety  line  of  business, for  which the  following are  not relevant
measures, business retention  rates  remained  strong in 2016. Renewal premium  changes  in 2016 were
slightly negative,  consistent with 2015.  New business premiums  in 2016 increased  over 2015. Net written
premiums of  $1.84  billion  in  2015  decreased by 14% from 2014,  primarily  due to changes in  foreign
currency  exchange  rates.  Excluding  the  surety line  of  business, for  which the  following are  not relevant
measures, business retention  rates  remained  strong in 2015. Renewal premium  changes  in 2015 were
slightly negative,  compared  with  positive renewal premium  changes in  2014.  New business  premiums in
2015 decreased  from 2014.

Bond  &  Specialty  Insurance

Results  of  Bond  &  Specialty  Insurance were  as follows:

(for the  year ended  December 31,  in  millions)

2016

2015

2014

Revenues:

Earned  premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,088
210
20
$2,318

$2,085
223
22
$2,330

$2,076
252
19
$2,347

Total claims and  expenses . . . . . . . . . . . . . . . . . . . . . . . .

$1,358

$1,425

$1,272

Operating  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 653

$ 633

$ 727

Loss and  loss adjustment  expense ratio . . . . . . . . . . . . . .
Underwriting  expense  ratio . . . . . . . . . . . . . . . . . . . . . . .

26.8% 30.4% 22.8%
37.5
37.6

38.0

Combined  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64.4% 67.9% 60.8%

85

Overview

Operating  income  in 2016 was  $653  million, $20 million or 3% higher  than operating income of

$633 million  in  2015,  primarily  reflecting the pre-tax impact of (i) higher  net favorable prior year
reserve  development,  partially  offset  by  (ii) lower  net investment income. Net favorable prior  year
reserve  development in 2016 and  2015  was $326 million and $258 million, respectively. Catastrophe
losses in 2016  and  2015  were  $6  million  and  $3  million, respectively.  Partially offsetting this net pre-tax
increase in operating  income  was  a related increase in income tax expense.

Operating  income  in 2015 was  $633  million, $94 million or 13% lower than operating income of

$727 million  in  2014,  primarily  reflecting the pre-tax impacts of (i) lower net favorable prior  year
reserve  development and (ii) lower net  investment  income, partially offset by (iii) higher underlying
underwriting  margins. Net favorable prior year reserve development in  2015  and 2014 was $258 million
and  $450  million,  respectively. Catastrophe losses  in 2015 and 2014 were $3  million and  $6 million,
respectively.  The  higher underlying underwriting  margins primarily  resulted  from lower loss estimates  in
certain  management  liability  businesses.  Partially offsetting this net pre-tax decrease in operating
income  was  a  related  decrease  in  income tax expense.  In addition, income  tax expense in 2015 was
reduced by  $16  million as a  result of  the  resolution of prior  year tax  matters.

Revenues

Earned Premiums

Earned  premiums of $2.09  billion in both 2016 and 2015 were comparable to the  respective prior

year amounts.

Net Investment  Income

Net  investment  income  in 2016  was  $210 million, $13  million or 6% lower than  in 2015.  Net
investment income in  2015 was  $223  million,  $29 million or 12% lower  than  in 2014. Included in
Bond &  Specialty  Insurance are certain  legal entities  whose invested assets and related net investment
income  are reported  exclusively  in this  segment  and not allocated  among all business segments. As  a
result, reported net  investment income  in Bond &  Specialty Insurance 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  2016 and a decrease in investment
income  in  2015. Refer  to the ‘‘Net  Investment Income’’ section of the ‘‘Consolidated  Results of
Operations’’  discussion  for  a description  of the factors contributing to the declines in the Company’s
consolidated net  investment  income in  2016 and  2015  compared with  the respective  prior years. In
addition,  refer  to note 2  of  notes  to the  consolidated financial statements for a discussion of the
Company’s net  investment  income  allocation  methodology.

Claims  and Expenses

Claims and Claim Adjustment Expenses

Claims  and claim  adjustment  expenses in 2016 were  $572 million, $71 million or 11% lower than  in

2015,  primarily reflecting  higher net favorable prior year  reserve development.  Claims and claim
adjustment  expenses in  2015 were $643 million, $162 million or 34% higher than in 2014, primarily
reflecting (i)  lower net  favorable prior  year reserve development, partially offset by  (ii) lower loss
estimates  in  certain management liability businesses. Factors contributing to net favorable prior year
reserve  development during the  years  ended December 31, 2016, 2015 and 2014 are discussed in more
detail in note  7  of notes to the consolidated financial statements.

86

Amortization  of  Deferred  Acquisition  Costs

Amortization  of  deferred  acquisition  costs in 2016 was $397 million, $4 million or 1%  higher than
in 2015.  Amortization  of deferred  acquisition costs  in 2015 was $393 million, $5  million or  1% higher
than in 2014.

General  and Administrative  Expenses

General and  administrative expenses in  2016  were $389 million, comparable with 2015. General

and  administrative  expenses  in 2015  were  $389  million,  $14 million or 3%  lower than in  2014. The
decrease in 2015  primarily  reflected  the  impact of certain customer-related intangible assets becoming
fully amortized  during the  second quarter of 2015.

Income Tax  Expense

Income  tax expense  in 2016  was  $307 million, $35  million or 13% higher  than in 2015, primarily
reflecting the  impact  of the  $55  million  increase in income before income taxes in 2016. Income  tax
expense in 2015 was  $272 million,  $76  million or 22% lower than in  2014, primarily reflecting  the
$170 million  decrease  in income before  income  taxes  and the $16 million reduction in income tax
expense in 2015 resulting  from the  resolution  of  prior  year tax matters.

Combined  Ratio

The combined ratio  of 64.4%  in 2016 was  3.5  points  lower than the  combined ratio of 67.9% in

2015.

The loss and  loss  adjustment  expense  ratio of 26.8% in  2016 was 3.6 points lower than the loss and

loss adjustment expense  ratio  of 30.4%  in 2015.  Net  favorable prior year reserve development in 2016
and  2015  provided  15.6  points  and  12.4  points of benefit, respectively, to the loss and loss adjustment
expense ratio. Catastrophe losses  in  2016  and 2015 accounted for 0.3  points and 0.2 points, respectively,
of  the loss  and loss  adjustment  expense  ratio.  The underlying loss  and  loss adjustment  expense ratio in
2016 was 0.5  points  lower than the  2015  ratio  on the  same basis.

The underwriting expense ratio of  37.6%  in 2016 was 0.1 points higher than the underwriting

expense ratio  of  37.5% in  2015.

The combined ratio  of 67.9%  in 2015 was  7.1  points  higher than the combined ratio of 60.8%  in

2014.

The loss and  loss  adjustment  expense  ratio of 30.4% in  2015 was 7.6 points higher than the  2014

ratio of  22.8%.  Net favorable  prior  year  reserve development in 2015 and 2014 provided 12.4 points
and  21.7  points  of benefit,  respectively,  to the  loss  and loss adjustment expense ratio. Catastrophe
losses in 2015  and  2014  accounted for  0.2 points and 0.3 points of the loss and loss adjustment expense
ratio, respectively. The  2015  underlying loss and loss adjustment expense  ratio  was  1.6 points lower
than the 2014  ratio  on  the same basis, primarily  reflecting lower loss estimates in certain management
liability  businesses.

The underwriting expense ratio of  37.5%  in 2015 was 0.5 points lower than the underwriting

expense ratio  of  38.0% in  2014, primarily  reflecting the impact of lower general  and administrative
expenses  discussed  above.

87

Written  Premiums

Bond &  Specialty  Insurance’s gross  and net written  premiums were as follows:

(for the year ended December 31, in  millions)

Gross Written  Premiums
2014
2015
2016

Total  Bond  &  Specialty Insurance . . . . . . . . . . . . . . . . . .

$2,183

$2,153

$2,165

(for the year ended December 31, in  millions)

Net Written  Premiums
2015

2014

2016

Total  Bond  &  Specialty Insurance . . . . . . . . . . . . . . . . . .

$2,099

$2,081

$2,103

Gross  written  premiums  in 2016 increased by  1% over 2015. Gross written premiums in 2015

decreased by  1%  from  2014.

Net  written  premiums  in 2016  were  $2.10  billion, $18 million or 1% higher than in 2015. Excluding

the  surety  line  of business,  for  which  the  following are not  relevant measures, business retention rates
remained  strong  in  2016. Renewal  premium changes in 2016  remained positive but were  lower than  in
2015.  New business premiums  in 2016  increased  over 2015.

Net  written  premiums  in 2015  were  $2.08  billion, $22 million or 1% lower than in 2014. Excluding
the  surety  line  of business,  for  which  the  following are not  relevant measures, business retention rates
remained  strong  in  2015. Renewal  premium changes in 2015  remained positive but were  lower than  in
2014.  New business premiums  in 2015  increased  over 2014.

Personal  Insurance

Results  of  Personal  Insurance  were  as  follows:

(for the year ended December 31, in  millions)

2016

2015

2014

Revenues:

Earned  premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,826
329
16
56

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,227

$7,268
332
15
48

$7,663

$7,125
379
12
80

$7,596

Total claims and  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$7,526

$6,372

$6,406

Operating  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 510

$ 889

$ 824

Loss and loss adjustment  expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting  expense  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Combined  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Incremental impact  of  direct to consumer initiative on combined ratio .

67.8%
27.3

95.1%

1.0%

58.1% 59.6%
28.5

29.1

86.6% 88.7%

1.8%

1.7%

Overview

Operating  income  in 2016 was  $510 million, $379 million or  43% lower than operating income  of
$889 million  in 2015,  primarily  reflecting the  pre-tax  impacts of (i) net  unfavorable prior year  reserve
development as  compared to  net favorable prior year reserve development in 2015, (ii) lower
underlying underwriting  margins and (iii) higher  catastrophe losses. Net unfavorable prior year reserve
development in  2016 was  $39 million,  compared  with net favorable prior year reserve development  of

88

$278 million  in  2015.  Catastrophe  losses  in  2016 and 2015 were $359 million and $264 million,
respectively.  The  lower  underlying  underwriting margins primarily resulted from higher loss estimates  in
the  Automobile  product line for  bodily  injury liability coverages. Partially offsetting this net pre-tax
decrease in operating income  was a related decrease  in income tax  expense.

Operating  income  in 2015 was  $889  million, $65 million or 8% higher  than operating income of

$824 million  in  2014,  primarily  reflecting the pre-tax impacts of (i) higher net favorable prior year
reserve  development and (ii) lower catastrophe  losses,  partially offset  by (iii) lower net investment
income  and (iv) a  decline  in other  revenues. Net favorable prior year reserve development in 2015 was
$278 million, compared with  $169  million in  2014. Catastrophe losses  in 2015 were $264 million,
compared with  $336  million  in  2014.  Partially offsetting  this net pre-tax increase in operating income
was a  related  increase  in  income tax  expense. Income  tax  expense in 2015 was  reduced by $4 million  as
a  result of the  resolution  of prior year  tax matters.

Revenues

Earned Premiums

Earned  premiums in  2016  were  $7.83 billion,  $558  million or 8% higher than in  2015. Earned
premiums in 2015 were $7.27  billion,  $143  million  or  2% higher than in 2014. The increases in earned
premiums in 2016 and 2015 reflected  increases  in net written  premiums over the respective preceding
twelve  months.

Net Investment  Income

Net  investment  income  in 2016  was  $329 million, $3 million or 1%  lower than in 2015. Net

investment income in  2015 was  $332  million,  $47 million or 12% lower  than  in 2014. Refer to the  ‘‘Net
Investment  Income’’ section  of  ‘‘Consolidated Results of Operations’’  for a discussion of the decreases
in the  Company’s net  investment  income in  2016  and 2015 as compared with  the respective  prior year.
In  addition,  refer to note 2 of  notes  to  the consolidated financial statements for a discussion of the
Company’s net  investment  income  allocation  methodology.

Other  Revenues

Other  revenues  in all years  presented included installment premium charges. Other  revenues in
2014 also included revenues  associated  with  the runoff of the Company’s National Flood Insurance
Program (NFIP) business  that  was sold  on  a  renewal rights basis in  2013.

Claims  and Expenses

Claims and Claim Adjustment Expenses

Claims  and claim  adjustment  expenses in 2016 were  $5.31 billion, $1.09  billion or 26% higher than

in 2015,  primarily  reflecting  (i) higher  volumes  of insured exposures, (ii) net unfavorable prior year
reserve  development as  compared  to  net  favorable prior year reserve development in 2015, (iii) higher
loss estimates  in  the  Automobile product line for bodily injury liability  coverages, (iv) the impact of  loss
cost  trends  and  (v)  higher  catastrophe  losses. Claims and  claim adjustment  expenses of $4.22  billion  in
2015 were comparable  to  2014, primarily reflecting (i)  higher net favorable prior year reserve
development and (ii)  lower catastrophe  losses, largely offset  by (iii) the  impact of loss cost trends  and
(iv)  higher volumes  of insured exposures.  Factors contributing to prior year  reserve development during
the  years  ended December  31, 2016, 2015  and 2014 are discussed in  more detail in note 7 of notes to
the  consolidated financial  statements.

89

Amortization  of  Deferred  Acquisition  Costs

Amortization  of  deferred  acquisition  costs in 2016 was $1.23 billion,  $67 million or 6% higher than

in 2015,  generally  consistent  with the  increase in  earned premiums. Amortization of deferred
acquisition  costs in  2015 was  $1.16  billion, $10 million  or 1% lower than in 2014.

General  and Administrative  Expenses

General and  administrative expenses of $988 million in both 2016 and 2015 were comparable with

the  respective  prior  year  amounts.

Income Tax  Expense

Income  tax expense  in 2016  was  $191 million, $211 million or 52% lower than in 2015, primarily
reflecting the  impact  of the  $590 million decrease  in income before income taxes  in 2016. Income tax
expense in 2015 was  $402 million,  $36  million or 10% higher  than  in 2014, primarily reflecting the
$101 million  increase  in  income  before  income  taxes, partially offset by the  $4 million reduction in
income  tax expense resulting from  the  resolution  of  prior year tax matters in  2015.

Combined  Ratio

The combined ratio  of 95.1%  in 2016 was  8.5  points  higher than the combined ratio of 86.6%  in

2015.

The loss and  loss  adjustment  expense  ratio of 67.8% in  2016 was 9.7 points higher than the  loss
and  loss adjustment  expense ratio  of  58.1% in 2015. Net unfavorable prior year reserve development  in
2016 accounted for  0.5  points of  the  loss and loss adjustment expense ratio in 2016. Net favorable  prior
year reserve development  provided 3.8  points of benefit  to the loss and loss  adjustment expense ratio  in
2015.  Catastrophe  losses accounted  for  4.5  points  and 3.6 points of  the loss and  loss adjustment
expense ratios in 2016 and 2015,  respectively. The underlying loss and loss adjustment expense ratio  in
2016 was 4.5  points  higher  than  the  2015  ratio on  the same basis, primarily reflecting (i) higher loss
estimates  in  the Automobile  product  line for  bodily  injury  liability coverages, (ii) the tenure impact  of
higher  levels  of new  business  in recent  years in the Automobile product line  and (iii) a higher level  of
automobile  business  relative to  homeowners and  other business.

The underwriting expense ratio of  27.3%  in 2016 was 1.2 points lower than the underwriting

expense ratio  of  28.5% in  2015, primarily  reflecting the impact of an increase in earned premiums.

The combined ratio  of 86.6%  in 2015 was  2.1  points  lower than the  combined ratio of 88.7% in

2014.

The loss and  loss  adjustment  expense  ratio of 58.1% in  2015 was 1.5 points lower than the 2014
ratio of  59.6%.  Net favorable  prior  year  reserve development in 2015 and 2014 provided 3.8 points and
2.4  points  of benefit to the  loss and loss  adjustment  expense ratio, respectively. Catastrophe losses
accounted for 3.6 points and 4.7 points  of  the 2015 and 2014 loss  and loss adjustment expense ratio,
respectively.  The  2015  underlying  loss  and loss adjustment  expense ratio was 1.0  point  higher than the
2014 ratio  on the  same  basis, primarily reflecting  (i)  the tenure impact of higher levels of new business
in recent years  in  the  Automobile product  line  and (ii)  a higher level of automobile  business relative to
homeowners  and  other business.

The underwriting expense ratio of  28.5%  in 2015 was 0.6 points lower than the underwriting

expense ratio  of  29.1% in  2014, primarily  reflecting lower commission expenses.

90

Agency Written Premiums

Gross  and  net written premiums  by product line  were as follows for Personal Insurance’s  Agency

business,  which  comprises  business  written through agents, brokers and other intermediaries and
represents almost  all  of Personal  Insurance’s gross  and net written  premiums:

(for the year ended December 31, in  millions)

Gross Written  Premiums
2014
2015
2016

Agency  Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency  Homeowners  and  Other . . . . . . . . . . . . . . . . . . .

$4,123
3,843

$3,551
3,773

$3,278
3,800

Total  Agency  Personal  Insurance . . . . . . . . . . . . . . . . .

$7,966

$7,324

$7,078

(for the year ended December 31, in  millions)

Net Written  Premiums
2015

2014

2016

Agency  Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency  Homeowners  and  Other . . . . . . . . . . . . . . . . . . .

$4,103
3,772

$3,534
3,687

$3,260
3,718

Total  Agency  Personal  Insurance . . . . . . . . . . . . . . . . .

$7,875

$7,221

$6,978

In  2016,  gross  and  net  agency  written premiums were both 9% higher than in 2015.

In  the Agency  Automobile  line  of  business, net  written premiums in 2016 were 16% higher than in

2015.  Business retention  rates remained  strong  in 2016.  Renewal premium changes  in 2016 remained
positive  and were higher than  in 2015.  New business premiums in 2016 increased over 2015.

In  the Agency  Homeowners  and  Other  line of business,  net written premiums in 2016 were  2%
higher  than in  2015.  Business retention  rates remained  strong in 2016. Renewal premium changes in
2016 remained  positive  but  were lower  than  in 2015.  New business premiums in 2016 increased over
2015.

In  2015,  gross  and  net  Agency  written  premiums were both 3% higher  than in 2014.

In  2015,  net written  premiums  in  the  Agency Automobile line of business were  8% higher than  in

2014.  Business retention  rates remained  strong  in 2015.  Renewal premium changes  in 2015 remained
positive  but were lower  than  in 2014.  New  business  premiums in  2015  increased over 2014.

In  2015,  net written  premiums  in  the  Agency Homeowners  and  Other line of business were 1%
lower than  in  2014.  Business  retention  rates  remained strong in 2015. Renewal premium changes  in
2015 remained  positive  but  were lower  than  in 2014.  New business premiums in 2015 increased over
2014.

For  its  Agency  business, Personal  Insurance  had approximately 6.6 million and 6.2 million active

policies  at  December  31, 2016 and 2015, respectively.

Direct  to Consumer Written  Premiums

In  the direct to  consumer business,  net written premiums in 2016 were $309 million, $73 million  or

31%  higher than  in 2015. In  2016, automobile net written premiums increased by $58 million or 35%
over  2015, and  homeowners  and other  net written premiums increased by $15  million or 21% over
2015.  Net  written  premiums  in 2015 were  $236  million,  $49  million or 26% higher than in 2014. In
2015,  automobile  net  written  premiums  increased by  $36 million or 28%  over  2014, and homeowners
and  other  net  written  premiums increased by $13 million or 23% over 2014. The  direct to consumer
business  had 296,000 and  242,000 active  policies  at  December 31, 2016 and  2015, respectively.

91

Interest Expense  and  Other

(for the year ended December 31, in  millions)

2016

2015

2014

Operating  income  (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(244) $(255) $(257)

The operating income  (loss)  for Interest Expense and  Other in  2016 was  $11  million lower than in

2015.  The  operating income  (loss) for  Interest and Other in 2015 was $2  million lower than in 2014.
After-tax interest expense in 2016,  2015  and  2014  was $236 million, $242 million and $240 million,
respectively.

ASBESTOS CLAIMS AND  LITIGATION

The Company believes  that  the property  and casualty  insurance industry has suffered from court
decisions  and  other trends  that  have  expanded  insurance coverage for asbestos claims far beyond the
original intent of insurers and  policyholders.  The  Company has received and continues to  receive a
significant number of  asbestos  claims  from the Company’s policyholders (which includes others seeking
coverage under  a policy). Factors  underlying  these  claim  filings include continued intensive advertising
by  lawyers seeking  asbestos claimants  and the  continued focus by plaintiffs on defendants who were  not
traditionally  primary  targets  of  asbestos  litigation. The focus on these defendants is primarily the result
of  the number  of  traditional  asbestos  defendants who  have sought bankruptcy protection in previous
years. In addition to  contributing  to  the  overall  number  of claims, bankruptcy proceedings may increase
the  volatility  of  asbestos-related  losses  by initially  delaying the reporting of claims and  later  by
significantly  accelerating  and increasing  loss  payments by insurers, including the Company. The
bankruptcy of many traditional  defendants has also caused  increased  settlement demands against  those
policyholders  who are not  in bankruptcy but  remain in  the tort system. Currently, in many jurisdictions,
those  who allege very serious  injury  and  who can present credible  medical evidence of their injuries  are
receiving  priority  trial  settings  in  the  courts,  while those who  have not shown any credible disease
manifestation  are  having their hearing  dates delayed  or  placed on an inactive docket. Prioritizing claims
involving  credible  evidence  of injuries,  along with  the focus on defendants who were not traditionally
primary  targets of asbestos  litigation,  contributes to the claims and claim adjustment expense  payment
patterns experienced  by  the  Company.  The Company’s  asbestos-related claims and claim adjustment
expense experience  also has  been  impacted  by the  unavailability of other  insurance  sources  potentially
available to  policyholders, whether  through exhaustion of policy limits or through  the insolvency of
other  participating  insurers.

The Company continues to  be  involved  in coverage  litigation  concerning  a number of

policyholders, some of whom have filed  for bankruptcy, who in some instances have asserted that all  or
a  portion of  their asbestos-related  claims  are  not  subject to aggregate limits on coverage. In these
instances, policyholders also  may  assert  that  each individual bodily injury  claim should be treated as a
separate  occurrence under  the policy.  It  is difficult  to predict whether these policyholders will be
successful on  both issues.  To  the extent both  issues are resolved in a policyholder’s favor  and other
Company  defenses are not  successful, the Company’s  coverage obligations under the policies at issue
would  be  materially increased and  bounded only  by the applicable per-occurrence limits and  the
number  of  asbestos  bodily injury claims  against the policyholders. Although the Company has  seen  a
reduction in the  overall  risk associated  with these lawsuits,  it remains  difficult to predict the ultimate
cost  of these claims.

Many coverage disputes  with policyholders  are  only resolved through settlement agreements.
Because many  policyholders make exaggerated  demands, it  is  difficult to predict the outcome of
settlement negotiations.  Settlements involving bankrupt  policyholders  may include extensive releases
which are favorable to the  Company  but which  could result in settlements for larger amounts than
originally  anticipated.  There also may  be instances where a court may not approve  a proposed

92

settlement,  which  may  result in  additional  litigation and  potentially less beneficial outcomes for the
Company. As  in  the  past,  the  Company  will  continue to  pursue settlement opportunities.

In  addition  to  claims  against policyholders, proceedings have been launched  directly against
insurers,  including  the  Company,  by  individuals challenging insurers’ conduct with respect to the
handling  of  past asbestos  claims  and  by  individuals seeking damages arising from alleged asbestos-
related  bodily  injuries.  Travelers Property  Casualty Corp. (TPC) had previously entered into settlement
agreements in  connection  with  a  number of  these direct action claims (Direct  Action Settlements). The
Company  had been  involved in litigation  concerning  whether all of  the conditions of the Direct  Action
Settlements had been satisfied.  On  July  22, 2014, the United States Court of  Appeals for the  Second
Circuit ruled  that all of the conditions  of the Direct Action Settlements had been satisfied. On
January  15,  2015, the  bankruptcy  court  entered an order directing the Company to pay $579 million  to
the  plaintiffs,  comprised  of  the  $502  million settlement  amounts,  plus pre- and  post-judgment interest
of  $77  million,  and  the  Company made  that payment  in 2015. For a full  discussion of these settlement
agreements and related  litigation,  see  the ‘‘Settlement  of Asbestos Direct Action Litigation’’ section of
note  16  of notes  to  the  consolidated  financial statements. It is possible that the filing of other direct
actions  against insurers, including the  Company, could be made in the future. It is difficult  to predict
the  outcome  of these  proceedings,  including whether the  plaintiffs will be able to  sustain these actions
against insurers based  on  novel  legal  theories  of liability. The Company believes it has meritorious
defenses to  these  claims and has received favorable rulings in certain jurisdictions.

On January 29,  2009,  the Company  and  PPG  Industries,  Inc.  (PPG), along with approximately 30

other  insurers of  PPG,  agreed in  principle  to settle asbestos-related coverage litigation under insurance
policies  issued  to  PPG  (the  ‘‘Agreement’’). The  Agreement was 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 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),  receive protections afforded by Section 524(g) of the Bankruptcy
Code from certain  asbestos-related  bodily injury claims. Under the Agreement, the Company had the
option to make a  series  of  payments over 20 years totaling  approximately $620 million to the trust
created under  the  Amended  Plan, or  it  could elect to make a discounted payment. On January 7, 2016,
the  remaining objections  to the Amended Plan were dismissed. On April  27, 2016, the Amended Plan
became effective  and  all  the remaining  conditions to the Agreement were satisfied. The Company fully
satisfied its obligation  under the Agreement by  making  a discounted payment  in the second quarter of
2016.  The  Company’s  payment  totaled  $524 million, of which $518 million was related to  asbestos
reserves. The Company’s  obligations  under  the Agreement were included in its claims and claim
adjustment  expense  reserves  at December 31, 2015.

Because  each  policyholder  presents different liability and  coverage issues,  the Company generally

reviews  the exposure  presented  by  each  policyholder at least annually. Among the factors which the
Company  may consider  in  the  course of this review are: available insurance coverage, including the role
of  any umbrella  or excess  insurance the  Company  has issued to the policyholder; limits and  deductibles;
an  analysis of the  policyholder’s potential liability;  the jurisdictions involved; past and anticipated future
claim activity  and  loss development  on pending  claims;  past settlement values of  similar claims;
allocated claim  adjustment  expense; potential role  of  other insurance; the role, if  any, of non-asbestos
claims  or  potential  non-asbestos claims  in  any  resolution  process; and applicable coverage defenses or
determinations, if  any,  including the determination as to whether or not an asbestos claim is a products/
completed  operation  claim  subject to an  aggregate  limit  and  the available coverage, if any, for that
claim.

93

In  the third  quarter of  2016,  the Company completed its annual in-depth asbestos claim review,

including a review  of  active policyholders and litigation  cases  for potential product and ‘‘non-product’’
liability,  and noted  the continuation  of  the following trends:

• continued  high level of litigation activity in  certain  jurisdictions involving individuals  alleging

serious  asbestos-related  illness,  primarily involving mesothelioma claims;

• while overall  payment  patterns have been  generally  stable, there has  been an increase in severity

for certain  policyholders due  to  the  continued high level  of  litigation  activity; and

• continued  moderate level  of asbestos-related bankruptcy activity.

In  the Home Office and  Field Office  category,  which  accounts for  the vast majority of

policyholders  with active  asbestos-related  claims, the number of policyholders tendering asbestos claims
for the  first time,  the number of  policyholders  with open asbestos claims and  both gross and net
asbestos-related  payments declined  slightly when compared to 2015. Payments on behalf  of
policyholders  in this  category  continue  to be influenced by the  high level of  litigation activity in a
limited number of  jurisdictions  where  individuals alleging serious asbestos-related injury, primarily
mesothelioma, continue to  target defendants who  were not traditionally primary targets of asbestos
litigation.

The Company’s  quarterly  asbestos reserve reviews include an analysis of exposure and claim
payment  patterns  by policyholder category, as well as recent settlements, policyholder bankruptcies,
judicial rulings  and  legislative actions.  The Company also analyzes developing  payment patterns  among
policyholders  in the  Home Office  and  Field Office, and Assumed Reinsurance and Other categories as
well as  projected reinsurance  billings  and  recoveries. In  addition, the Company reviews its historical
gross and  net  loss  and  expense paid  experience, year-by-year, to assess any emerging trends,
fluctuations, or  characteristics suggested  by the  aggregate  paid activity. Conventional actuarial methods
are not  utilized  to establish  asbestos reserves nor  have  the  Company’s evaluations resulted  in any way
of  determining  a  meaningful  average  asbestos  defense or indemnity payment.

The completion of  these  reviews and analyses in 2016, 2015 and 2014 resulted in $225 million,
$224 million  and  $250  million  increases,  respectively, in the Company’s net asbestos reserves. 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
due to a higher than  previously  anticipated  level of litigation activity  surrounding  mesothelioma claims.
This increase in the  estimate  of projected  settlement and defense costs resulted from payment trends
that  continue  to  be  higher than previously anticipated due to the impact of the current  litigation
environment discussed  above.  Over  the  past decade, the property and casualty insurance industry,
including the Company, has  experienced net unfavorable prior year reserve development with  regard to
asbestos reserves, but  the Company believes  that over that period there has been a reduction in the
volatility associated  with  the Company’s  overall asbestos exposure as the overall asbestos  environment
has evolved  from one  dominated by  exposure to  significant litigation risks, particularly coverage
disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to
the  aggregate limits  contained in  their policies, to an  environment primarily driven by a frequency  of
litigation related to individuals  with mesothelioma.  The  Company’s  overall view of the  current
underlying asbestos environment is essentially unchanged from recent periods and there remains a  high
degree  of uncertainty  with  respect  to future exposure to asbestos  claims.

Net  asbestos paid loss  and loss expenses in  2016, 2015 and 2014 were $708 million, $770 million

and  $242  million,  respectively. Net payments in  2016  included the payment of the $518 million
settlement amounts related  to  PPG  as described above. Net payments in  2015 included the payment  of
the  $502  million settlement  amounts  related to the  Settlement of Asbestos  Direct Action Litigation as
described in more  detail in note 16 of  notes  to the consolidated financial  statements. Approximately

94

69%, 69%  and  8% of  total net  paid  losses in 2016, 2015 and 2014, respectively, related to  policyholders
with whom the Company  had  entered  into settlement agreements  limiting the  Company’s liability.

The Company categorizes  its  asbestos reserves as  follows:

(at and for the year ended December 31,  $ in millions)

Number of
Policyholders
2015
2016

Policyholders with  settlement  agreements . . . . . . . . . .
Home office  and  field  office . . . . . . . . . . . . . . . . . . . .
Assumed  reinsurance and  other . . . . . . . . . . . . . . . . .

11
1,599
—

18
1,624
—

Total Net  Paid
2015
2016

$488
204
16

$532
220
18

Net  Asbestos
Reserves

2016

2015

$

39
1,118
169

$ 554
1,101
155

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,610

1,642

$708

$770

$1,326

$1,810

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.  As  discussed  above,  in 2016 the Company paid a  $518 million
settlement related to asbestos-related  coverage litigation  under  insurance policies issued  to PPG. That
amount had been  included in  the Policyholders with Settlement Agreements category in the foregoing
table  at  December  31,  2015. As also  discussed  above,  in 2015 the Company paid a $502 million
settlement related to the  asbestos direct  action litigation.

The Home Office and  Field  Office  category  relates to all other policyholders and also  includes

IBNR  reserves and reserves  for the costs of defending asbestos-related coverage litigation. IBNR
reserves  in  the  Home  Office  and Field  Office category include amounts  for new claims and adverse
development on  existing  Home  Office  and  Field Office policyholders, as well as reserves  for claims
from  policyholders  reporting  asbestos  claims  for the  first time  and  for  policyholders for which  there  is,
or may  be, litigation.  Policyholders are  identified for  the annual home office review based upon, among
other  factors:  a combination  of past  payments and current case reserves in  excess of a specified
threshold (currently $100,000),  perceived level  of exposure,  number of reported claims, products/
completed  operations and  potential ‘‘non-product’’ exposures, size of policyholder and geographic
distribution  of  products  or  services  sold  by the  policyholder. The Assumed Reinsurance and Other
category  primarily  consists  of  reinsurance of excess coverage, including various pool participations.

95

The following  table  displays  activity  for  asbestos  losses  and loss expenses and reserves:

(at and for the year ended December 31, in millions)

2016

2015

2014

Beginning  reserves:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,989
(179)

$2,520
(163)

$2,606
(256)

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,810

2,357

2,350

Incurred  losses  and  loss expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Paid  loss  and loss  expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign exchange  and other:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ending reserves:

355
(130)

225

831
(123)

708

(1)
—

(1)

313
(89)

224

843
(73)

770

(1)
—

(1)

258
(8)

250

343
(101)

242

(1)
—

(1)

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,512
(186)

1,989
(179)

2,520
(163)

Net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,326

$1,810

$2,357

See ‘‘—Uncertainty Regarding  Adequacy of Asbestos and Environmental Reserves.’’

ENVIRONMENTAL  CLAIMS AND  LITIGATION

The Company has  received  and continues to receive claims from policyholders who allege that they
are liable for  injury  or  damage arising  out of their alleged disposition of  toxic substances.  Mostly, these
claims  are due to  various  legislative  as  well as regulatory efforts aimed at environmental remediation.
For  instance, the  Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA),  enacted in 1980  and  later  modified,  enables  private parties as well as  federal and state
governments  to take  action with respect  to releases and  threatened releases of hazardous substances.
This federal statute  permits  the  recovery  of response costs from some liable parties and may require
liable  parties  to  undertake their own  remedial action. Liability under CERCLA may be joint  and
several  with other  responsible parties.

The Company has  been, and continues  to be, involved in litigation involving insurance coverage

issues  pertaining  to  environmental  claims.  The Company believes that some  court  decisions have
interpreted the  insurance  coverage to be broader  than  the original intent  of the insurers and
policyholders. These decisions  often  pertain to insurance policies  that  were issued by the Company
prior to the mid-1980s. These  decisions continue to  be inconsistent and vary from jurisdiction to
jurisdiction.  Environmental claims, when submitted,  rarely indicate the  monetary amount being sought
by  the claimant from  the policyholder,  and the Company does not keep track of the monetary amount
being sought  in those  few claims which indicate  a monetary amount.

The resolution  of environmental exposures by  the Company generally  occurs through settlements

with policyholders as opposed  to claimants. Generally, the Company  strives to extinguish any
obligations it  may  have under any policy issued to  the policyholder for past, present  and future
environmental liabilities  and  extinguish  any  pending coverage litigation dispute with the policyholder.

96

This form of  settlement  is  commonly  referred to  as a ‘‘buy-back’’  of policies  for future  environmental
liability.  In addition,  many of  the  agreements  have  also extinguished any insurance obligation which  the
Company  may have for other  claims,  including  but not  limited to asbestos and  other cumulative injury
claims.  The  Company  and its  policyholders  may  also agree to settlements which extinguish  any liability
arising  from known  specified  sites  or  claims. Where appropriate, these agreements also include
indemnities and  hold  harmless  provisions to protect the Company. The Company’s general purpose in
executing these  agreements is  to  reduce  the Company’s potential  environmental exposure  and eliminate
the  risks presented  by  coverage  litigation with  the policyholder  and  related costs.

In  establishing environmental  reserves, the  Company evaluates the exposure presented by  each
policyholder  and the  anticipated cost  of  resolution, if  any. In the course of this analysis, the Company
generally  considers the  probable liability,  available coverage and relevant  judicial interpretations. In
addition,  the  Company considers the  many variables presented, such  as: the  nature of  the alleged
activities of the  policyholder  at  each  site; the number of sites; the total number of potentially
responsible  parties at each site; the  nature of the  alleged  environmental harm and the corresponding
remedy  at each  site;  the nature  of  government enforcement  activities at each site;  the ownership and
general use  of  each  site; the  overall  nature of the  insurance relationship  between the Company and  the
policyholder,  including  the  role of  any  umbrella  or  excess insurance the Company has  issued to the
policyholder;  the  involvement  of  other  insurers; the potential for other available coverage,  including the
number  of  years  of  coverage;  the  role,  if any, of  non-environmental claims or potential
non-environmental  claims  in  any resolution process; and the applicable law in each jurisdiction. The
evaluation  of  the exposure presented  by  a  policyholder  can change as information  concerning that
policyholder  and the  many  variables  presented is  developed. Conventional actuarial methods are not
used  to estimate these  reserves.

In  its review  of environmental  reserves, the  Company  considers: past settlement payments;
changing judicial  and  legislative  trends;  its reserves  for the costs of litigating environmental coverage
matters;  the potential  for policyholders  with smaller exposures to be  named in new clean-up actions for
both on-  and off-site waste  disposal  activities; the potential for adverse development; the potential for
additional  new claims beyond previous  expectations; and the potential higher  costs for new settlements.

The duration  of the  Company’s  investigation  and review of these  claims and the extent of time
necessary to determine an appropriate  estimate, if any,  of the value of  the claim to  the Company vary
significantly  and  are  dependent upon  a  number of factors. These factors include, but are not limited to,
the  cooperation of  the  policyholder in  providing claim information, the pace of underlying litigation  or
claim processes,  the  pace of coverage  litigation between  the policyholder and the Company and the
willingness of  the  policyholder  and the  Company  to negotiate, if appropriate, a resolution of any
dispute pertaining to  these claims.  Because these factors vary from  claim-to-claim  and
policyholder-by-policyholder,  the  Company cannot  provide a meaningful average of the duration of  an
environmental claim.  However, based  upon the Company’s experience in resolving these claims, the
duration  may  vary from months to  several years.

The Company continues to  receive notices from policyholders tendering claims for the first time,
frequently under  policies issued prior  to  the mid-1980s. These policyholders  continue to present smaller
exposures, have fewer  sites  and are lower tier  defendants. Further, in many instances, clean-up costs
have  been reduced because regulatory agencies  are  willing  to accept risk-based  site analyses and more
efficient clean-up  technologies.  Over the  past  several years, the  Company has experienced  generally
favorable trends in  the  number of new  policyholders  tendering environmental  claims  for the first time
and  in the  number  of pending declaratory  judgment actions relating to environmental matters.
However, the degree to  which  those favorable trends have  continued has been less than anticipated.  In
addition,  reserve  development on existing  environmental claims has been greater than anticipated,
driven by claims  and legal developments  in  a limited  number of jurisdictions. As a result  of these
factors,  in  2016, 2015 and 2014,  the Company increased its net environmental reserves by  $82 million,
$72 million and  $87 million,  respectively.

97

Net  environmental  paid loss  and  loss  expenses were  $61 million, $55 million and $84 million  in
2016,  2015 and 2014,  respectively.  At  December 31,  2016, approximately 93% of the net environmental
reserve  (approximately $354  million)  was carried in  a bulk reserve  and  included unresolved
environmental claims, incurred  but not  reported environmental claims and  the anticipated cost of
coverage litigation disputes  relating  to  these  claims. The bulk  reserve the Company carries is
established  and  adjusted  based  upon  the  aggregate  volume of in-process environmental claims  and the
Company’s experience  in resolving  those claims. The balance, approximately 7% of the net
environmental reserve  (approximately  $28 million), consists of case reserves.

The following  table  displays  activity  for  environmental  losses and loss expenses  and reserves:

(at and for the year ended December 31, in millions)

2016

2015

2014

Beginning  reserves:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$375
(14)

$353
(7)

$355
(11)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

361

346

344

Incurred  losses  and  loss expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Paid  loss  and loss  expenses:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign exchange  and other:

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ending reserves:

87
(5)

82

67
(6)

61

—
—

—

81
(9)

72

56
(1)

55

(3)
1

(2)

94
(7)

87

95
(11)

84

(1)
—

(1)

Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

395
(13)

375
(14)

353
(7)

Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$382

$361

$346

UNCERTAINTY REGARDING  ADEQUACY  OF ASBESTOS AND ENVIRONMENTAL RESERVES

As a result of  the  processes and  procedures  discussed above, management believes that the

reserves  carried  for  asbestos and  environmental claims are appropriately  established based upon  known
facts, current  law  and management’s  judgment. However, the uncertainties surrounding the final
resolution of these claims continue, and  it is difficult  to determine the ultimate exposure for asbestos
and  environmental claims  and  related litigation. As  a  result, these  reserves are subject to revision as
new  information  becomes available  and as claims develop. The  continuing uncertainties include,
without limitation,  the  risks and lack  of  predictability inherent in complex litigation,  any impact from
the  bankruptcy  protection sought by  various asbestos  producers and other asbestos defendants, a
further increase  or decrease  in the cost to resolve,  and/or the number of, asbestos and environmental
claims  beyond  that  which is anticipated,  the emergence of a greater number of asbestos  claims than
anticipated  as a  result of extended  life expectancies  resulting from medical  advances and  lifestyle
improvements,  the role of any umbrella or  excess policies the  Company has issued, the resolution or
adjudication of  disputes  pertaining to  the amount of  available coverage for asbestos and environmental

98

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.

Because  of the  uncertainties  set  forth above, additional  liabilities may arise for amounts in excess
of  the Company’s  current insurance  reserves.  In addition, the Company’s estimate of  claims and claim
adjustment  expenses  may change.  These  additional  liabilities or increases in  estimates, or a range of
either,  cannot  now be  reasonably  estimated and could result in income statement charges that could be
material  to the  Company’s operating  results  in future periods.

INVESTMENT  PORTFOLIO

The Company’s  invested  assets  at December 31, 2016 were $70.49 billion, of which 93% was

invested  in  fixed  maturity  and short-term investments,  1% in equity securities, 1% in real estate
investments and  5% in other investments. Because the  primary  purpose of the investment portfolio  is
to fund future  claims  payments,  the Company employs a conservative investment philosophy. A
significant majority  of  funds  available  for investment are deployed in a widely diversified portfolio of
high  quality, liquid, taxable  U.S. government,  tax-exempt U.S.  municipal and taxable corporate and U.S.
agency  mortgage-backed  bonds.

The carrying value  of  the  Company’s fixed  maturity portfolio at  December 31, 2016 was
$60.52  billion.  The  Company  closely  monitors the  duration of its fixed maturity investments, and
investment purchases  and  sales  are executed with the objective of having adequate funds available  to
satisfy  the Company’s insurance  and debt  obligations.  The weighted average credit quality of the
Company’s fixed maturity  portfolio,  both including and  excluding U.S. Treasury securities, was  ‘‘Aa2’’  at
both December  31,  2016 and  2015. Below investment grade securities represented 2.9% and 2.8%  of
the  total  fixed  maturity  investment  portfolio at December 31,  2016 and 2015,  respectively. The average
effective  duration  of  fixed maturities  and  short-term securities was 4.2 (4.5 excluding short-term
securities) at  December 31, 2016  and  3.9  (4.2 excluding short-term securities) at December  31, 2015.

99

The carrying values of investments  in fixed maturities classified as available for sale at

December 31, 2016  and 2015  were  as  follows:

(at December 31, in millions)

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

Obligations  of  states,  municipalities  and  political

subdivisions:

2016

2015

Carrying
Value

Average Credit
Quality(1)

Carrying
Value

Average Credit
Quality(1)

$ 2,035

Aaa/Aa1

$ 2,194

Aaa/Aa1

Local  general  obligation . . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State general  obligation . . . . . . . . . . . . . . . . . . .
Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,044
10,978
1,731
5,157

Aaa/Aa1
Aaa/Aa1
Aaa/Aa1
Aaa/Aa1

Total  obligations of states, municipalities and

political  subdivisions . . . . . . . . . . . . . . . . . . . .

31,910

Aaa/Aa1
Aaa/Aa1
Aa1
Aa1

13,318
9,960
2,073
6,060

31,411

Debt  securities  issued  by foreign  governments . . . . . .

1,662

Aaa/Aa1

1,873

Aaa/Aa1

Mortgage-backed  securities,  collateralized  mortgage

obligations and pass-through securities . . . . . . . . . .

1,708

Aa2

1,981

Aa3

All  other  corporate  bonds and  redeemable preferred

stock:
Financial:

Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance/leasing . . . . . . . . . . . . . . . . . . . . . . . .
Brokerage and asset  management . . . . . . . . . .

Total  financial . . . . . . . . . . . . . . . . . . . . . . .

Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canadian  municipal  securities . . . . . . . . . . . . . . . .
Sovereign  corporate  securities(2) . . . . . . . . . . . . . .
Commercial  mortgage-backed securities and project
loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed  and other . . . . . . . . . . . . . . . . . . . . .

2,606
678
35
32

3,351

14,067
2,370
1,093
552

938
829

Total  all  other  corporate  bonds and

redeemable  preferred  stock . . . . . . . . . . .

23,200

A1
A1
Ba3
A1

A3
A2
Aa1
Aaa

Aaa
Aa2

2,637
623
42
34

3,336

14,151
2,311
1,085
696

865
755

23,199

A1
A1
Ba2
A1

A3
A3
Aa1
Aaa

Aaa
Aa2

Total fixed maturities . . . . . . . . . . . . . . . . . .

$60,515

Aa2

$60,658

Aa2

(1) Rated using external rating  agencies  or by the Company when a public  rating does  not exist.

(2) Sovereign  corporate  securities include corporate securities that are backed by a government and
include  sovereign  banks  and  securities issued under  the Federal Ship Financing Programs.

(3) Included in  commercial  mortgage-backed securities and project loans at December 31, 2016 and
2015 were $285  million and  $295 million  of  securities guaranteed  by the U.S. government,
respectively,  and  $5  million and  $8 million  of  securities guaranteed by government sponsored
enterprises,  respectively.

100

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:

(at December 31, 2016, in millions)

Quality  Rating:

Carrying
Value

Percent of Total
Carrying Value

Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Baa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  investment grade . . . . . . . . . . . . . . . . . . . . . . . . . .
Below  investment  grade . . . . . . . . . . . . . . . . . . . . . . . . .

$25,795
17,456
8,368
7,139

58,758
1,757

42.6%
28.9
13.8
11.8

97.1
2.9

Total  fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . .

$60,515

100.0%

The amortized cost and fair  value  of fixed maturities by  contractual maturity follow. Actual
maturities will  differ  from  contractual  maturities  because borrowers may have the right to call  or
prepay obligations  with  or  without  call  or prepayment penalties.

(at December 31, 2016, in millions)

Amortized
Cost

Fair
Value

Due  in  one year or  less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due  after  1 year through  2  years . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Due  after  2 years  through  3  years
. . . . . . . . . . . . . . . . . . . . . .
Due  after  3 years  through  4  years
Due  after  4 years  through  5  years
. . . . . . . . . . . . . . . . . . . . . .
Due  after  5 years  through  10  years . . . . . . . . . . . . . . . . . . . . . .
Due  after  10  years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,619
4,373
4,593
3,379
4,072
14,258
21,742

$ 5,677
4,492
4,751
3,481
4,202
14,449
21,755

Mortgage-backed  securities,  collateralized  mortgage  obligations

and pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . . .

1,614

1,708

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$59,650

$60,515

58,036

58,807

Obligations  of States, Municipalities and  Political  Subdivisions

The Company’s  fixed maturity investment  portfolio at December 31, 2016 and 2015 included
$31.91  billion  and  $31.41  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, 2016 and 2015 were $5.16 billion  and
$6.06  billion, respectively,  of pre-refunded bonds, which  are  bonds for which states or municipalities
have  established  irrevocable trusts, almost  exclusively comprised of U.S. Treasury securities, which were
created to  satisfy their responsibility for payments of principal  and  interest. The irrevocable trusts are
verified  as to their  sufficiency by an independent verification agent of the underwriter, issuer or  trustee.
All  of  the Company’s  holdings of  securities issued  by Puerto Rico and related entities have been
pre-refunded  and  therefore  are  defeased  by U.S.  Treasury securities.

101

The following  table  shows  the geographic  distribution of the $26.75 billion of municipal bonds at

December 31, 2016  that  were not  pre-refunded.

(at December 31, 2016, in millions)

State:

State
General

Local
General

Obligation Obligation

Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . .
North Carolina . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Massachusetts . . . . . . . . . . . . . . . . . . . . . . . . .
New  York . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Carolina . . . . . . . . . . . . . . . . . . . . . . . .
Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Arizona . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  others(2) . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 112
128
73
128
105
29
43
11
68
—
59
169
70
—
736

$1,731

$ 2,570
1,131
769
1,065
754
753
58
85
634
628
545
345
475
383
3,849

Total
Carrying
Value

Average
Credit
Quality(1)

Revenue

$

983
532
900
337
464
488
1,057
818
196
259
162
208
159
315
4,100

Aaa
$ 3,665
1,791
Aa1
1,742 Aaa/Aa1
1,530 Aaa/Aa1
1,323 Aaa/Aa1
1,270 Aaa/Aa1
1,158 Aaa/Aa1
914 Aaa/Aa1
898 Aaa/Aa1
Aa1
887
Aa1
766
722
Aa1
704 Aaa/Aa1
Aa1
698
8,685 Aaa/Aa1

$14,044

$10,978

$26,753 Aaa/Aa1

(1) Rated using external rating  agencies  or by the Company when a public  rating does  not exist.

Ratings  shown  are  the  higher of  the  rating  of  the underlying issuer  or the insurer in the case of
securities enhanced  by  third-party  insurance for the payment of principal and interest in the event
of  issuer default.

(2) No  other single state accounted  for  2.5% or more  of the total non-pre-refunded municipal bonds.

The following  table  displays  the funding sources  for the $10.98 billion of municipal bonds

identified as revenue  bonds  in the  foregoing table at December 31, 2016.

(at December 31, 2016, in millions)

Source:

Carrying
Value

Average Credit
Quality(1)

Water  and sewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Higher  education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Power  and  utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenue sources . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,419
2,671
878
875
557
164
94
45
11
1,264

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,978

Aaa/Aa1
Aaa/Aa1
Aa2
Aa1
Aa1
Aa2
Aaa/Aa1
Aa3
Aa2
Aaa/Aa1

Aaa/Aa1

(1) Rated using external rating agencies or by the Company when a public  rating does  not

exist. Ratings shown  are the higher of the rating of  the underlying issuer or the insurer  in
the case of  securities  enhanced by  third-party insurance for the  payment of principal  and
interest in  the event  of issuer default.

102

The Company bases its  investment decision  on the underlying credit characteristics of the

municipal  security.  While its  municipal  bond  portfolio includes a number of securities that  were
enhanced by  third-party insurance for  the  payment of principal and interest  in the event of an  issuer
default, the Company  does  not  rely  on  enhanced credit characteristics provided  by such third-party
insurance as  part of its investing  decisions.  Of  the insured municipal  securities in the Company’s
investment portfolio  at December  31,  2016, approximately 99%  were rated at ‘‘A3’’ or above,  and
approximately 96%  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, 2016.  The
average  credit  rating  of  the  entire  municipal  bond  portfolio was ‘‘Aa1’’ at December 31, 2016, with and
without the enhancement  provided  by  third-party insurance.

Debt Securities  Issued  by  Foreign Governments

The following  table  shows  the geographic  distribution of the Company’s long-term  fixed maturity

investments in  debt  securities  issued  by  foreign governments at December 31, 2016.

(at December 31, 2016, in millions)

Foreign Government:

Carrying
Value

Average Credit
Quality(1)

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United  Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  Others(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,055
557
50

Aaa
Aa2
A3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,662

Aaa/Aa1

(1) Rated using external rating agencies or by the Company when a public  rating does  not

exist.

(2) The  Company  does  not have direct exposure to  sovereign debt issued by the Republic of

Ireland, Italy, Greece, Portugal  or Spain.

(3) No  other country accounted for 2.5%  or  more of total  debt securities issued by foreign

governments.

The following  table  shows  the Company’s Eurozone exposure at December 31,  2016 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
corporate securities (comprised of  industrial corporations and utility companies) which could be
affected if economic  conditions  deteriorated due to a prolonged recession.

103

Debt Securities
Issued
by Foreign
Governments

Corporate  Securities
Sovereign
Corporates

Financial

All Other

(at December 31, 2016, in millions)

Value Quality(1)

Value Quality(1)

Value Quality(1)

Value Quality(1)

Carrying

Carrying

Carrying

Carrying

Average
Credit

Average
Credit

Average
Credit

Average
Credit

Eurozone  Periphery
Spain . . . . . . . . . . . . . . . . . . .
$—
Ireland . . . . . . . . . . . . . . . . . . —
Greece . . . . . . . . . . . . . . . . . . —
Italy . . . . . . . . . . . . . . . . . . . . —
. . . . . . . . . . . . . . . . . —
Portugal

Subtotal . . . . . . . . . . . . . . . . —

Eurozone  Non-Periphery
Germany . . . . . . . . . . . . . . . . . —
France . . . . . . . . . . . . . . . . . .
50
Netherlands . . . . . . . . . . . . . . —
Austria . . . . . . . . . . . . . . . . . . —
Finland . . . . . . . . . . . . . . . . . .
2
Belgium . . . . . . . . . . . . . . . . . —
Luxembourg . . . . . . . . . . . . . . —

Subtotal . . . . . . . . . . . . . . . .

52

Total

. . . . . . . . . . . . . . . .

$52

—
—
—
—
—

—
Aa2
—
—
Aa1
—
—

$ 54
—
—
—
—

54

14
11
91
—
—
—
—

116

$170

A2
—
—
—
—

Baa1
A2
A1
—
—
—
—

$ —
—
—
—
—

—

— $
—
—
—
—

2

132 Aaa/Aa1
Aa1
117 Aaa/Aa1
Aa2
95
Aa1
2
—
—
—
—

16
73
—
—
—

89

335
444
332
—
—
200
1

Baa2
Baa1
—
—
—

A3
A2
A2
—
—
Baa1
Ba2

348

$348

1,312

$1,401

(1) Rated using external rating  agencies  or by the Company when a public  rating does  not exist. The
table  includes $350  million  of  short-term  securities which have the highest  ratings issued by
external  rating agencies for short-term  issuances. For purposes of this table, the short-term
securities,  which  are  rated  ‘‘A-1+’’ and/or ‘‘P-1,’’  are  included as  ‘‘Aaa’’ rated securities.

In  addition  to  fixed  maturities noted in the  foregoing  table, the Company  has exposure totaling

$146 million  to  private  equity  limited  partnerships  and real estate partnerships (both  of which  are
included  in  other investments  in the Company’s  consolidated  balance sheet) whose primary investing
focus  is across Europe.  The  Company  has unfunded commitments  totaling $113 million to these
partnerships. The Company also has  $4  million  of  non-redeemable  preferred  stock (included in  equity
securities on the Company’s  consolidated balance  sheet) issued by  companies in the Eurozone.

Mortgage-Backed  Securities,  Collateralized Mortgage  Obligations and Pass-Through Securities

The Company’s fixed maturity investment portfolio at December 31, 2016 and 2015 included

$1.71  billion  and  $1.98 billion, respectively, of residential mortgage-backed securities,  including
pass-through-securities  and  collateralized mortgage obligations (CMOs), all of which are subject to
prepayment risk (either shortening  or  lengthening  of  duration). While prepayment risk for securities
and  its effect  on  income cannot be fully  controlled, particularly  when interest rates move dramatically,
the  Company’s investment strategy generally favors securities that reduce this risk within  expected
interest  rate ranges.  The  Company makes investments in residential CMOs  that are either guaranteed
by  GNMA, FNMA  or FHLMC, or  if not guaranteed, are senior or super-senior positions within their
respective securitizations.  Both guaranteed and non-guaranteed residential CMOs allocate the
distribution  of  payments from the underlying mortgages  among different  classes of bondholders.  In
addition,  non-guaranteed  residential  CMOs provide structures that  allocate the impact of credit  losses
to different  classes of bondholders.  Senior  and super-senior CMOs are protected, to varying degrees,

104

from  credit  losses  as those  losses  are  initially  allocated to subordinated bondholders. The Company’s
investment strategy is to purchase  CMO tranches  that are expected to offer the  most favorable return
given the Company’s  assessment  of associated risks. The Company does not  purchase residual interests
in CMOs. For more  information  regarding the  Company’s  investments  in residential mortgage-backed
securities,  see  note  3  of  notes to  the  consolidated financial statements.

Alternative  Documentation  Mortgages  and Sub-Prime  Mortgages

At December 31, 2016  and 2015, the Company’s fixed maturity investment portfolio included

CMOs  backed  by alternative  documentation mortgages and asset-backed securities collateralized by
sub-prime  mortgages  with  a collective  fair  value of  $142 million and $185  million,  respectively
(comprising  less  than  1%  of  the  Company’s  total fixed  maturity investments at both dates).  The
Company  defines sub-prime  mortgage-backed securities  as investments in which the underlying loans
primarily  exhibit  one or more  of the  following characteristics: low FICO scores, above-prime interest
rates,  high loan-to-value ratios  or  high  debt-to-income  ratios. Alternative documentation securitizations
are those  in which the  underlying  loans  primarily meet  the  government-sponsored entities’ requirements
for credit score  but  do  not  meet the  government-sponsored entities’ guidelines  for documentation,
property type,  debt  and  loan-to-value  ratios.  The  average credit rating on these securities and
obligations held  by  the  Company  was  ‘‘Ba3’’  and  ‘‘Ba2’’  at December 31, 2016 and 2015, respectively.
The Company does not  believe  this portfolio  exposes it  to a  material adverse impact on its results of
operations, financial position or liquidity, due  to the  portfolio’s relatively small  size.

Commercial  Mortgage-Backed  Securities  and Project  Loans

At December 31, 2016  and 2015, the Company held commercial  mortgage-backed securities
(including FHA  project  loans) of  $938  million  and $865 million, respectively. The Company does not
believe  this  portfolio exposes it  to a  material  adverse  impact on its results of operations, financial
position or liquidity, due  to  the  portfolio’s  relatively  small size and the underlying credit  strength of
these securities. For  more  information  regarding  the Company’s investments  in commercial mortgage-
backed securities, see note 3 of  notes  to  the consolidated financial statements.

Equity Securities Available  for Sale,  Real  Estate and Short-Term  Investments

See note 1 of  notes to  the  consolidated financial statements for further information about  these

invested  asset classes.

Other  Investments

The Company also  invests  in  private  equity  limited partnerships, hedge funds, and real estate

partnerships. Also included  in  other  investments are non-public common and preferred equities and
derivatives. These  asset classes  have  historically provided a  higher return than fixed maturities but  are
subject to  more  volatility. At both December  31, 2016 and 2015, the carrying value of the Company’s
other  investments  was $3.45 billion.

Securities  Lending

The Company has  engaged  in securities lending  activities from which it generates net investment

income  by lending certain  of its investments to other institutions for short periods of time. At
December 31, 2016  and 2015, the Company had $286 million and $269 million of securities  on loan,
respectively,  as  part of a  tri-party lending agreement.  The  average monthly balance of securities on loan
during  2016  and  2015 was  $346  million  and $268 million,  respectively. Borrowers of  these securities
provide  collateral equal  to  at least 102%  of  the market value of  the loaned  securities plus accrued

105

interest. The  Company has  not incurred  any  investment losses  in its securities lending program  for  the
years  ended  December 31,  2016,  2015  and 2014.

Lloyd’s  Trust  Deposit

The Company utilizes  a Lloyd’s trust  deposit, whereby  owned securities  with a fair value of
approximately $97  million  and  $140 million held by a wholly-owned  subsidiary at December 31,  2016
and  2015, respectively, were pledged  into a  Lloyd’s trust account to provide a portion  of the capital
needed to support  the Company’s  obligations  at Lloyd’s.

Net Unrealized  Investment  Gains

The net unrealized  investment  gains that  were included as a separate component of accumulated

other  comprehensive income  were  as  follows:

(at December 31, in millions)

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized investment  gains  before tax . . . . . . . . . . . . .
Tax  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016

2015

2014

$ 865
228
19

1,112
382

$1,780
177
17

1,974
685

$2,673
320
15

3,008
1,042

Net  unrealized  investment  gains at end of year . . . . . . .

$ 730

$1,289

$1,966

Net  unrealized  investment  gains  at December 31, 2016 and 2015 decreased from the respective
prior year-ends,  primarily reflecting  the  impact of an increase in market interest rates in 2016 and  2015.

The following  table  summarizes,  for all fixed  maturities  and equity securities reported at fair value

for which fair  value  is  less than 80% of  amortized cost  at December 31, 2016, the gross unrealized
investment loss by  length  of  time  those  securities have continuously been in an unrealized loss position
of  greater than  20% of  amortized cost:

(in millions)

Fixed  maturities:

Period For  Which Fair Value Is Less Than 80% of Amortized Cost

Greater Than Greater Than

3 Months,
6 Months
or Less

6  Months,
12 Months
or Less

3 Months
or Less

Greater Than
12 Months

Total

Mortgage-backed  securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  fixed  maturities . . . . . . . . . . . . . . .
Equity  securities . . . . . . . . . . . . . . . . . . . . .

$—
1

1
1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2

$—
—

—
—

$—

$—
—

—
—

$—

$—
2

2
—

$ 2

$—
3

3
1

$ 4

These  unrealized investment losses at December 31, 2016 represent less  than 1%  of  the combined
fixed  maturity  and  equity  security portfolios  on a pre-tax basis and less  than  1%  of shareholders’  equity
on  an  after-tax basis.

For  fixed maturity investments where fair value  is  less than  the carrying  value  and  the Company
did  not reach  a decision  to  impair,  the  Company continues  to  have  the intent  and  ability  to hold  such
investments to  a projected  recovery  in value, which may  not  be  until maturity.

At December  31,  2016 and  2015, below investment grade securities  comprised  2.9% and  2.8%,
respectively, of  the Company’s  fixed  maturity investment portfolio.  Included in  below  investment  grade

106

securities at December 31,  2016 were  securities in an unrealized loss position that, in the  aggregate,
had  an  amortized  cost of $521  million  and a fair  value of $503 million, resulting  in a net pre-tax
unrealized investment  loss of  $18  million.  These securities  in an unrealized loss position represented
approximately 0.9% of the total  amortized cost and 0.8% of the fair value of the  fixed maturity
portfolio at December 31, 2016 and  accounted for 3.6% of the total gross pre-tax unrealized investment
loss in the fixed maturity  portfolio  at  December  31, 2016.

Impairment  Charges

Impairment  charges  included  in net  realized investment gains in  the consolidated statement of

income  were  as  follows:

(for the year ended December 31, in  millions)

2016

2015

2014

Fixed  maturities

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

$— $— $—
Obligations  of  states,  municipalities  and political subdivisions . . — — —
Debt securities  issued  by foreign governments . . . . . . . . . . . . . — — —
Mortgage-backed  securities,  collateralized  mortgage  obligations

and pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . . — —
13

1
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

15

Total  fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

13

16

Equity  securities

Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . .

9
9
37
3 — —

Total  equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

2

37

2

9

1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29

$52

$26

Following are  the  pre-tax  realized  losses  on investments  sold during the year ended December  31,

2016:

(for the year ended December 31, 2016,  in  millions)

Fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss

Fair Value

$20
3

$23

$562
35

$597

Purchases and  sales  of  investments are based  on  cash  requirements, the  characteristics of the
insurance liabilities and current market  conditions. The Company identifies investments  to be sold to
achieve  its primary investment goals of  assuring the Company’s ability to meet policyholder obligations
as well  as  to  optimize investment returns, given  these obligations.

CATASTROPHE MODELING

The Company uses various  analyses and  methods, including proprietary and third-party computer
modeling  processes, to make underwriting  and reinsurance  decisions designed to manage its exposure
to catastrophic events. There are no  industry-standard methodologies or assumptions for projecting
catastrophe  exposure. Accordingly,  catastrophe estimates provided by different insurers may not be
comparable.

107

The Company actively monitors and  evaluates  changes in third-party  models and, when necessary,

calibrates  the  catastrophe  risk model  estimates delivered via its own proprietary modeling  processes.
The Company considers  historical loss  experience, recent  events,  underwriting practices, market share
analyses, external  scientific analysis  and  various  other factors including non-modeled losses  to refine its
proprietary  view of  catastrophe risk.  These proprietary models are continually updated as new
information  emerges.

The tables below  set  forth the  probabilities that estimated  losses, comprising claims and allocated
claim adjustment expenses  (but  excluding unallocated claim adjustment expenses),  from a single event
occurring in a one-year  timeframe  will  equal or exceed the indicated loss  amounts (expressed in dollars
and  as a percentage  of  the  Company’s  common equity), based on  the proprietary  and third-party
computer models  utilized by  the  Company  at  December  31, 2016.  For example, on the basis described
below the tables,  the  Company estimates  that there is a one percent  chance  that the Company’s loss
from  a single U.S.  hurricane  in  a  one-year timeframe would equal or exceed $1.3 billion,  or 6% of  the
Company’s common equity  at December  31,  2016.

Likelihood of Exceedance(1)

Dollars (in billions)

Single U.S. and
Canadian
Hurricane

Single U.S. and
Canadian
Earthquake

2.0% (1-in-50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0% (1-in-100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4% (1-in-250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1% (1-in-1,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$0.9
$1.3
$1.8
$3.8

$0.4
$0.6
$0.9
$1.6

Likelihood of Exceedance

Percentage of Common Equity(2)
Single U.S. and
Single U.S. and
Canadian
Canadian
Earthquake
Hurricane

2.0% (1-in-50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.0% (1-in-100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4% (1-in-250) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1% (1-in-1,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4%
6%
8%
17%

2%
3%
4%
7%

(1) An event  that has,  for example, a 2% likelihood of exceedance  is  sometimes described  as
a  ‘‘1-in-50 year event.’’  As noted above,  however, the probabilities in the table represent
the likelihood  of losses  from a  single event  equaling or exceeding  the indicated threshold
loss  amount  in a  one-year timeframe, not over a multi-year timeframe. Also, because the
probabilities relate to  a single event, the probabilities  do not address the likelihood of
more  than one  event occurring in a particular period,  and, therefore, the amounts do not
address  potential aggregate catastrophe  losses occurring in a one-year timeframe.

(2) The  percentage  of  common equity is calculated by  dividing (a) indicated loss amounts in
dollars by  (b) total common equity excluding  net unrealized investment  gains and losses,
net of  taxes. Net  unrealized investment gains and losses  can be significantly impacted by
both  discretionary and other economic factors  and are not necessarily indicative of
operating trends. Accordingly, the Company’s management uses the percentage of
common equity calculated on this basis  as a metric to  evaluate the potential impact of a
single hurricane  or single  earthquake on  the Company’s  financial position  for purposes  of
making  underwriting  and  reinsurance decisions.

The threshold  loss amounts in the tables  above, which  are based on the Company’s in-force
portfolio at December 31, 2016 and catastrophe  reinsurance program at January 1, 2017, are net of

108

reinsurance,  after-tax  and  exclude  unallocated claim  adjustment expenses, which historically have been
less  than 10%  of loss  estimates.  For  further  information regarding the Company’s  reinsurance, see
‘‘Item 1—Reinsurance.’’ The  amounts  for  hurricanes reflect U.S.  and  Canadian exposures and include
property exposures,  property residual  market exposures and an adjustment for certain non-property
exposures. The hurricane  loss  amounts  are based on the Company’s catastrophe risk model estimates
and  include losses from  the hurricane  hazards of wind and  storm surge. The amounts for earthquakes
reflect  U.S.  and Canadian property  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.

Catastrophe  modeling relies upon  inputs  based  on experience, science, engineering and history.

These  inputs  reflect a  significant amount of judgment  and are  subject to changes which may result  in
volatility in the modeled  output.  Catastrophe modeling  output may also fail  to account  for risks that
are outside the  range of normal  probability  or  are  otherwise unforeseeable. Catastrophe modeling
assumptions include,  among others,  the  portion of purchased reinsurance that is collectible after a
catastrophic event,  which may prove  to  be  materially  incorrect. Consequently, catastrophe modeling
estimates  are subject to  significant  uncertainty. In the tables above, the uncertainty associated  with the
estimated threshold loss  amounts  increases  significantly  as the likelihood of exceedance decreases.  In
other  words, in  the case  of a relatively  more  remote event (e.g.,  1-in-1,000), the estimated threshold
loss amount is relatively less  reliable.  Actual losses from an event could materially exceed the indicated
threshold loss amount. In  addition,  more than one  such  event could  occur in any period.

Moreover,  the Company  is exposed to  the risk  of  material  losses from other than property and

workers’  compensation  coverages  arising  out of hurricanes and earthquakes, and it is exposed to
catastrophe  losses  from perils other than hurricanes and earthquakes, such  as tornadoes and other
windstorms,  hail,  wildfires, severe  winter  weather, floods, tsunamis, volcanic eruptions and other
naturally-occurring  events, such  as  solar  flares,  as well as  acts of terrorism and cyber-risk.

For  more  information  about the Company’s exposure to catastrophe  losses, see ‘‘Item 1A—Risk

Factors—Catastrophe losses  could  materially and adversely  affect our  results  of  operations,  our
financial position  and/or liquidity,  and  could  adversely  impact our ratings, our ability to raise capital
and  the  availability  and cost  of reinsurance’’ and  ‘‘Item 1A—Risk  Factors—We  may be adversely
affected if our  pricing and capital models provide materially different indications than actual results.’’

CHANGING CLIMATE CONDITIONS

Severe  weather events over  the last two decades  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. For example, hurricane and storm surge activity  have
impacted  areas  further inland  than  previously experienced, and demographic changes have resulted  in
larger  populations  in  coastal  areas  which  historically have been subject to  severe storms,  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  more volatile  during the last decade.
Accordingly, 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  in frequency  and severity of severe weather events or other emerging trends
in climate conditions.

The Company discusses  how potentially changing climate conditions may present other issues for

its  business  under  ‘‘Risk Factors’’ in Item 1A of this  report and under ‘‘—Outlook.’’ For example,
among  other things:

• Increasingly unpredictable and  severe weather conditions could result in increased frequency  and
severity  of claims  under policies issued by the Company.  See ‘‘Risk  Factors—Catastrophe losses

109

could  materially and  adversely  affect our results of operations, our  financial  position and/or
liquidity,  and could adversely impact  our ratings, our ability to  raise  capital and the  availability
and  cost  of  reinsurance’’  and ‘‘—Outlook—Underwriting  Gain/Loss.’’

• Changing climate  conditions  could also impact the creditworthiness  of issuers of securities in

which  the Company  invests.  For example,  water  supply adequacy could  impact  the
creditworthiness of bond  issuers  in the Southwestern United States,  and more frequent  and/or
severe  hurricanes could impact  the creditworthiness of issuers  in the  Southeastern  United  States,
among  other areas.  See ‘‘Risk  Factors—Our investment  portfolio is subject  to  credit  and  interest
rate risk,  and  may  suffer reduced  returns or material realized or unrealized  losses.’’

• Increased regulation adopted  in response  to potential changes in climate conditions may impact

the  Company and its customers. For example, state insurance regulation could impact the
Company’s  ability  to  manage  property exposures in areas  vulnerable to  significant climate driven
losses. If  the  Company  is unable to implement  risk based pricing, modify policy  terms  or  reduce
exposures  to  the extent  necessary  to address rising losses related  to catastrophes and  smaller
scale  weather  events  (should those increased  losses occur),  its  business  may be  adversely
affected.  See ‘‘Risk  Factors—Catastrophe  losses could  materially  and  adversely affect  our results
of  operations,  our financial  position and/or liquidity,  and  could  adversely  impact  our ratings,  our
ability to  raise  capital  and  the availability and  cost  of reinsurance.’’  In addition, climate change
regulation could  increase the  Company’s customers’ costs  of  doing business.  For example,
insureds  faced with carbon management regulatory  requirements may have less available capital
for investment in  loss  prevention and safety features which may,  over time,  increase loss
exposures.  Increased  regulation  may also  result in reduced economic activity, which  would
decrease the  amount of insurable  assets and  businesses.

• The full range of potential  liability exposures related to climate change continues to evolve.

Through  the Company’s  Emerging Issues  Committee and  its  Committee  on Climate,  Energy  and
the  Environment,  the Company  works  with  its  business units  and  corporate  groups,  as
appropriate,  to identify  and  try  to assess climate change-related  liability issues,  which are
continually  evolving and  often  hard to  fully evaluate.  The  Company regularly reviews  emerging
issues,  including changing  climate conditions,  to  consider  potential changes to  its  modeling  and
the  use of such  modeling, as well  as to help determine the  need for  new underwriting strategies,
coverage  modifications  or new  products. See ‘‘Risk Factors—The  effects of emerging  claim  and
coverage  issues  on  our business  are uncertain.’’

REINSURANCE  RECOVERABLES

The Company reinsures a  portion  of the risks  it underwrites in order to control  its  exposure to
losses.  For  additional  discussion  regarding the Company’s  reinsurance coverage,  see  ‘‘Part I—Item 1—
Reinsurance.’’

The following  table  summarizes  the  composition of the Company’s reinsurance recoverables:

(at December 31, in millions)

2016

2015

Gross reinsurance recoverables  on paid and unpaid claims and

claim adjustment  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for  uncollectible reinsurance . . . . . . . . . . . . . . . . . . . . .

$3,181
(116)

$3,848
(157)

Net  reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory  pools  and  associations . . . . . . . . . . . . . . . . . . . . . . . . .
Structured  settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,065
2,054
3,168

3,691
2,015
3,204

Total reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,287

$8,910

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The $626  million  decline  in net  reinsurance recoverables from December 31, 2015 primarily

reflected  the  impact of cash collections  in 2016, including the settlement of a reinsurance dispute which
is discussed in more  detail  in  note  16  of  notes to the  consolidated financial statements.

The following  table  presents the  Company’s top five reinsurer groups by reinsurance recoverable at

December 31, 2016  (in  millions).  Also  included is the  A.M.  Best  rating  of each reinsurer group at
February 16,  2017:

Reinsurer Group

Reinsurance
Recoverable

A.M.  Best  Rating  of Group’s  Predominant Reinsurer

Swiss Re  Group . . . . . . . . . . . . . . . . . . . . . .
Berkshire  Hathaway . . . . . . . . . . . . . . . . . . .
Sompo  Japan  Nipponkoa Group . . . . . . . . . .
Munich Re Group . . . . . . . . . . . . . . . . . . . .
XL  Capital Group . . . . . . . . . . . . . . . . . . . .

$367
245
205
185
145

second highest of 16 ratings

A+
A++ highest of 16 ratings
A+
A+
A

second highest of 16 ratings
second highest of 16 ratings
third highest of 16 ratings

At December 31, 2016,  the Company  held  $1.0 billion of collateral in the form of letters of credit,

funds  and  trust agreements  held  to  fully  or partially collateralize certain reinsurance recoverables.

Included in reinsurance recoverables are  amounts  related to structured  settlements, which are
annuities purchased from  various life  insurance companies to settle certain  personal physical injury
claims,  of  which  workers’  compensation  claims  comprise a  significant portion. In cases where the
Company  did  not receive a  release  from  the  claimant, the amount due from the life insurance company
related  to  the  structured  settlement  is  included in  the Company’s consolidated balance sheet as a
reinsurance recoverable and  the  related  claim cost is included in the liability  for claims and  claim
adjustment  expense  reserves,  as  the Company retains the  contingent liability to the claimant. If it is
expected that  the life  insurance company is not able  to pay,  the Company would recognize  an
impairment  of the  related reinsurance  recoverable  if, and to the extent, the purchased  annuities are not
covered by  state guaranty  associations.  In the event that the life insurance company fails to make the
required  annuity  payments,  the  Company would  be required to  make such payments. The following
table  presents the  Company’s top five  groups by  structured settlements  at December  31, 2016 (in
millions). Also  included is  the  A.M.  Best rating  of  the Company’s predominant insurer  from each
insurer  group at February  16, 2017:

Group

Structured
Settlements

A.M. Best Rating  of Group’s Predominant Insurer

Fidelity  & Guaranty  Life  Group(1) . . . . . . . . . .
MetLife  Group(2) . . . . . . . . . . . . . . . . . . . . . .
Genworth  Financial  Group(3) . . . . . . . . . . . . . .
John  Hancock  Group . . . . . . . . . . . . . . . . . . . .
Symetra  Financial  Corporation . . . . . . . . . . . . .

$881
390
378
295
267

B++ fifth highest of 16 ratings
A
third highest of 16 ratings
B++ fifth highest of 16 ratings
A+
A

second highest of 16 ratings
third highest of 16 ratings

(1) Fidelity &  Guaranty  Life (FGL)  has entered into a  definitive merger agreement with Anbang
Insurance  Group  Co.,  Ltd. whereby Anbang will acquire  all of the outstanding shares  of FGL.
Regulatory approvals are  still in progress. A.M. Best’s  ratings of FGL were placed under  review
with developing implications following the announcement  of the merger agreement. The Company
does not have  any  structured settlements with  Anbang.

(2) MetLife Inc. previously  announced a plan  to pursue  the separation of a substantial portion of  its
U.S. Retail segment into an entity to be named Brighthouse Financial, Inc. Brighthouse will
include  MetLife Insurance  Company USA, which  holds the  majority of the structured  settlement
annuities  that  the Company  has with MetLife. On October 7, 2016, A.M. Best  downgraded

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MetLife  Insurance Company  USA’s  financial strength rating to A (Excellent) from A+ (Superior),
with a  stable  outlook.

(3) On  October 23,  2016, Genworth  Financial (Genworth)  announced that they have entered into a

definitive agreement under which China Oceanwide Holdings Group  Co., Ltd. (China Oceanwide)
has agreed  to acquire all  of the  outstanding  shares of Genworth. The transaction, which has been
approved  by both  companies’ boards of  directors,  is  expected to close  by the middle of 2017,
subject to  the  requisite  approval by  Genworth’s stockholders as well as certain other  closing
conditions,  including the  receipt of  regulatory approvals. China  Oceanwide  is a privately held,
family owned international  financial holding group headquartered in Beijing, China. Following  the
announcement  A.M.  Best affirmed  the financial strength rating of Genworth Life & Annuity
Insurance  Company  at B++  (Good),  and downgraded Genworth Life Insurance Company and
Genworth Life  Insurance  Company  of New York from B++ (Good) to B (Fair) and placed  all
ratings under  review  with negative  implications.

The Company considers  the ratings  and related  outlook assigned to reinsurance companies and life
insurance companies  by  various  independent ratings agencies in assessing the adequacy of  its  allowance
for uncollectible  amounts.

OUTLOOK

The following  discussion  provides outlook information  for  certain key  drivers of the Company’s

results  of operations  and  capital position.

Premiums. The  Company’s  earned  premiums are a  function  of  net written premium volume.  Net

written premiums comprise  both  renewal business and new business and are recognized as  earned
premium  over the  life  of the  underlying  policies. When business  renews, the amount of net written
premiums  associated  with that  business  may increase or decrease (renewal  premium change) as a result
of  increases or decreases  in rate  and/or  insured exposures, which the Company considers as  a measure
of  units  of  exposure  (such  as the  number  and  value of vehicles or properties insured).  Net  written
premiums  from  both renewal  and  new  business, and therefore earned premiums, are impacted by
competitive  market  conditions as well  as general economic conditions, which, particularly in the case of
Business and International  Insurance,  affect  audit premium adjustments, policy  endorsements and
mid-term cancellations.  Property  and  casualty insurance market conditions are expected to remain
competitive.  Net written premiums  may  also be  impacted by the structure of reinsurance programs and
related costs, as well  as  changes in  foreign currency exchange  rates.

Overall, the  Company  expects  retention  levels (the  amount of  expiring premium that renews,
before the impact of  renewal  premium  changes) will remain strong  by historical standards during 2017.
In Business and  International  Insurance, the Company expects that domestic  renewal premium changes
during 2017  will  remain  positive  and  will  be broadly consistent with the levels attained in 2016. Given
the  relatively  smaller  amount of  premium that the Company generates from outside the  United States
and  the transactional nature  of  some  of  those markets, particularly  Lloyd’s, international renewal
premium  changes  during  2017  could  be  somewhat higher, broadly consistent with or  somewhat lower
than  the  levels  attained  in 2016.  In  Bond & Specialty Insurance, the Company expects that renewal
premium  changes  with respect  to  management liability  business during 2017  will  remain positive,  but
will  be  lower  than the  levels attained  in  2016. With respect to surety  business within Bond & Specialty
Insurance, the  Company expects that  net written premium volume  during 2017 will be  slightly higher
than  the  level attained  in 2016.  In  Personal  Insurance, the Company expects that  Agency Auto renewal
premium  changes  during  2017  will  remain positive and will be higher than the levels attained in 2016,
and  Agency Homeowners  and  Other  renewal premium changes  during 2017 will remain positive and
will  be  broadly  consistent with  the  levels  attained in 2016. The  need for state regulatory approval for

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changes  to personal property and  casualty  insurance prices,  as well  as competitive market conditions,
may impact the timing  and  extent  of  renewal premium  changes.

Property  and casualty  insurance  market conditions are expected to remain competitive during  2017

for new business.  In each  of  the  Company’s business segments, new business generally has less of  an
impact on  underwriting  profitability  than renewal business, given the volume of new business relative to
renewal business.  However,  in  periods  of  meaningful increases in new business, despite its positive
impact on  underwriting  gains over time,  the  impact of higher  new business levels may negatively impact
the  combined  ratio  in  the short-term.

General economic and  geopolitical uncertainty  regarding a variety of domestic  and international

matters,  such  as  the  political  and regulatory environment, the U.S.  Federal budget and potential
changes  in tax  laws  in the United States,  the repeal, replacement or modification of the Affordable
Care  Act, economic  uncertainty in  the  United  States  and in various parts  of the world, the United
Kingdom’s expected  withdrawal  from  the European Union,  rapid changes in commodity prices, such as
in oil,  and fluctuations in  interest  rates  and  foreign  currency exchange rates, has  added to the
uncertainty  regarding  economic  conditions generally. If economic conditions deteriorate, the resulting
lower levels  of economic activity  could  impact exposure changes at  renewal and the Company’s ability
to write  business at  acceptable  rates.  Additionally, lower 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  in 2017,  and because
earned  premiums are  a function of  net  written premiums, earned premiums could be adversely
impacted  on  a  lagging  basis.

Underwriting  Gain/Loss. The  Company’s  underwriting gain/loss  can  be significantly impacted  by

catastrophe  losses  and net  favorable  or  unfavorable prior year reserve development,  as well as
underlying  underwriting  margins.

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

For  a  number of years,  the  Company’s results  have included significant amounts of net favorable

prior year  reserve  development  driven  by better than expected loss experience. However, given the
inherent uncertainty in  estimating claims  and claim adjustment expense reserves, loss experience could
develop such  that  the  Company recognizes higher or lower levels of favorable prior year  reserve
development,  no  favorable  prior  year  reserve  development or unfavorable prior year  reserve
development in  future periods. In  addition, the  ongoing  review of prior year claims and claim
adjustment  expense  reserves,  or other  changes in current period circumstances, may result in the
Company  revising  current  year loss estimates  upward or downward in future periods of the current
year.

It  is  possible that  changes in economic conditions could lead to higher  inflation than the Company

had  anticipated,  which could in  turn  lead  to  an  increase  in the Company’s loss costs and the need  to
strengthen claims  and  claim  adjustment expense reserves. These impacts of  inflation on loss costs and
claims  and claim adjustment expense reserves could be more  pronounced for those lines of business
that  are considered  ‘‘long  tail’’, such  as general liability,  as they require a relatively long period  of time
to finalize and settle claims for  a given  accident  year. For a further discussion, see ‘‘Part I—Item  1A—
Risk Factors—If  actual  claims  exceed  our claims and claim adjustment expense reserves, or if changes
in the  estimated  level of  claims and claim adjustment  expense reserves  are  necessary, including as a
result of, among other  things, changes  in  the legal,  regulatory and economic environments in which  the
Company  operates,  our  financial results could be materially and adversely affected,’’ and ‘‘Changes  in
U.S. tax  laws or  in the  tax  laws of  other jurisdictions in which we operate  could adversely impact us.’’

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In  Business  and International  Insurance,  the Company expects underlying underwriting margins
and  the  underlying  combined  ratio  during 2017 will be  broadly consistent with those in 2016, reflecting
the  impact of  loss trends  in excess  of  earned  pricing, largely offset by lower  (and more normalized)
levels of non-catastrophe weather-related  losses.

In  Bond  & Specialty  Insurance,  the Company  expects underlying underwriting margins and the

underlying combined ratio during  2017  will be  broadly consistent with those in 2016.

In  Personal  Insurance, the Company expects underlying underwriting  margins during 2017 will be
slightly higher  than  in 2016  and the  underlying combined  ratio during  2017  will  be broadly consistent
with 2016.  In Agency  Automobile, the  Company  expects  that underlying underwriting margins and  the
underlying combined ratio will  improve  in 2017 compared with 2016, reflecting  actions  taken to
improve profitability  that will  earn in  increasingly throughout the year.  In Agency Homeowners and
Other, the Company expects  that  underlying underwriting margins will be  slightly lower and the
underlying combined ratio will  be  slightly  higher  in 2017 than in the 2016, reflecting higher (and  more
normalized)  levels  of  loss activity. Also  in Personal Insurance, the  Company’s direct  to consumer
initiative,  the  distribution  channel  that  the  Company  launched in 2009,  while intended to enhance the
Company’s long-term  ability to  compete  successfully in  a consumer-driven marketplace, is  expected to
remain  modest  with respect  to premium  volume  and  remain  unprofitable  for a number of years as  this
book  of  business  grows  and  matures.

Investment  Portfolio. The  Company expects to continue to focus its  investment  strategy  on
maintaining  a  high-quality investment  portfolio and a relatively short average effective duration. The
average  effective duration  of fixed  maturities  and short-term securities was 4.2 (4.5 excluding short-term
securities) at  December 31, 2016. From  time to time, the Company enters into short positions in  U.S.
Treasury futures contracts to  manage  the duration of its fixed maturity portfolio. At December 31,
2016,  the Company had  $400  million  notional value of open U.S. Treasury  futures contracts. The
Company  continually evaluates its  investment alternatives and mix. Currently, the majority of the
Company’s investments are comprised  of  a  widely diversified portfolio of high-quality, liquid, taxable
U.S. government,  tax-exempt  U.S. municipal  and taxable corporate and U.S. agency mortgage-backed
bonds.

The Company also  invests  much smaller amounts in equity securities, real estate, private equity
limited partnerships,  hedge funds,  and  real estate partnerships and joint ventures. These investment
classes have  the  potential  for higher  returns  but also  the potential  for higher degrees of risk, including
less  stable rates of return  and  less liquidity.

Net  investment  income  is  a  material  contributor to the Company’s results of operations. Although
interest  rates increased  in the  latter part  of  2016, they  remain at very low levels by historical  standards.
Based on the  current  interest rate  environment, the  Company estimates that the impact of  lower
reinvestment  yields,  partially  offset  by  the impact of a  slightly higher level of fixed maturity  investments,
could,  during  2017,  result in approximately $15  million to $20 million of lower after-tax net investment
income  from  that portfolio  on a quarterly basis as compared to the corresponding quarters of 2016.  Net
investment income from  the non-fixed maturity  investment portfolio in  2016 was higher than in 2015.
The impact of future market conditions  on net  investment income from  the non-fixed  maturity
investment portfolio during 2017  is  hard  to predict.  If  general economic conditions and/or investment
market conditions  deteriorate during 2017, the  Company could experience a reduction in net
investment income and/or  significant  realized  investment losses, including impairments.

The Company had a  net  pre-tax unrealized investment  gain of $865 million ($569 million after-tax)

in its  fixed  maturity investment  portfolio  at  December  31, 2016. While the Company does not attempt
to predict future  interest rate  movements, a rising interest rate environment would reduce the market
value of fixed maturity investments and,  therefore, reduce shareholders’  equity,  and a declining interest
rate environment would have the opposite  effects. The Company’s investment portfolio has benefited

114

from  certain  tax  exemptions  (primarily  those related  to interest  from municipal bonds) and certain
other  tax laws, including, but not limited to, those  governing dividends-received deductions  and tax
credits  (such as foreign tax credits).  Changes in these laws could adversely impact  the value of the
Company’s investment  portfolio.  See  ‘‘Changes  in U.S.  tax laws or in the tax laws of other jurisdictions
in which we operate could  adversely  impact us’’  included in ‘‘Part I—Item 1A—Risk Factors.’’

For  further  discussion of the  Company’s  investment  portfolio,  see ‘‘Investment Portfolio.’’ For  a
discussion of the  risks to  the  Company’s  business  during or following a financial market disruption and
risks  to  the Company’s investment portfolio,  see the risk factors entitled ‘‘During or following a period
of  financial market  disruption  or  an  economic downturn, our business could be materially and adversely
affected’’ and  ‘‘Our  investment portfolio is subject  to  credit  and interest rate risk,  and may suffer
reduced returns  or material  realized  or  unrealized  losses’’ included in ‘‘Part  I—Item 1A—Risk Factors.’’
For  a  discussion of  the risks  to the  Company’s  investments from  foreign currency exchange rate
fluctuations, see the  risk  factor entitled  ‘‘We are also subject to a number of additional risks associated
with our business outside the  United  States’’  included in ‘‘Part I—Item 1A—Risk Factors’’ and see
‘‘Part II—Item 7A—Quantitative  and  Qualitative Disclosures About Market Risk—Foreign Currency
Exchange Rate Risk.’’

Capital  Position. The  Company believes it has  a strong capital  position  and, as part  of its ongoing

efforts to  create  shareholder value,  expects  to continue  to return capital not needed to support its
business  operations  to  its  shareholders.  The Company expects that, generally  over  time, the
combination of  dividends  to common  shareholders  and  common share repurchases will likely not
exceed operating income. In  addition,  the timing  and actual number of  shares to be repurchased in  the
future will  depend  on a  variety  of  additional factors, including the Company’s financial position,
earnings,  share  price, catastrophe losses,  maintaining capital levels commensurate with  the Company’s
desired  ratings from  independent rating  agencies, funding of the Company’s qualified pension plan,
capital requirements of the  Company’s  operating  subsidiaries, legal requirements, regulatory constraints,
other  investment opportunities  (including mergers and acquisitions and related  financings), market
conditions and other  factors. For information regarding  the Company’s common share  repurchases  in
2016,  see ‘‘Liquidity and  Capital  Resources.’’  As a result of  the Company’s business outside of the
United States, primarily  in  Canada, the  United  Kingdom  (including Lloyd’s), the Republic of Ireland
and  Brazil,  the Company’s  capital  is  also subject to  the effects of changes in foreign currency exchange
rates.  For example, strengthening  of the  U.S. dollar in  comparison to other currencies could result  in a
reduction of  shareholders’  equity.  For  additional  discussion of the Company’s foreign exchange market
risk  exposure,  see  ‘‘Part II—Item 7A—Quantitative and  Qualitative Disclosures About Market Risk.’’

Many of  the  statements in this ‘‘Outlook’’ section  are  forward-looking statements, which  are
subject to  risks  and  uncertainties  that  are often difficult  to predict and beyond the Company’s  control.
Actual  results could  differ materially  from those expressed or implied by  such forward-looking
statements. Further,  such  forward-looking statements speak only as of the date of this report and the
Company  undertakes no obligation to update  them. See ‘‘—Forward Looking Statements.’’  For a
discussion of potential risks  and  uncertainties that  could impact  the Company’s results of operations  or
financial position,  see  ‘‘Part I—Item  1A—Risk Factors’’  and ‘‘Critical Accounting Estimates.’’

115

LIQUIDITY  AND CAPITAL  RESOURCES

Liquidity  is a measure  of  a company’s ability to  generate sufficient cash flows to meet the  cash

requirements  of its business  operations  and to  satisfy general corporate purposes when needed.

Operating  Company  Liquidity. The  liquidity requirements of the  Company’s insurance  subsidiaries

are met  primarily  by funds  generated  from premiums, fees, income received on investments and
investment maturities.  Cash  provided  from these sources  is  used primarily for claims and claim
adjustment  expense  payments  and operating  expenses.  The insurance  subsidiaries’ liquidity
requirements  can be  impacted  by, among other factors, the timing  and  amount of catastrophe claims,
which are inherently  unpredictable,  as  well as  the timing  and amount of  reinsurance  recoveries, which
may be affected  by  reinsurer  solvency  and reinsurance  coverage disputes. Additionally, the variability of
asbestos-related  claim payments,  as  well  as  the volatility of potential judgments and settlements arising
out  of  litigation,  may  also result in  increased liquidity  requirements. It is the opinion of the Company’s
management  that the  insurance subsidiaries’ future liquidity needs will be adequately met from all  of
the  sources  described  above.  Subject  to  restrictions imposed by states in which the Company’s insurance
subsidiaries are domiciled, the Company’s principal insurance subsidiaries pay dividends to their
respective parent companies, which in  turn pay dividends to the corporate holding (parent) company
(TRV). For further information  regarding restrictions on dividends  paid by the Company’s  insurance
subsidiaries, see  ‘‘Part I—Item  1—Regulation.’’

Holding  Company  Liquidity. TRV’s liquidity requirements primarily include  shareholder dividends,

debt  servicing,  common  share  repurchases and, from time  to time, contributions to its qualified
domestic pension  plan.  At  December  31, 2016, TRV held total cash and short-term invested assets  in
the  United States aggregating $1.68  billion  and having  a  weighted average maturity of 81  days. TRV
has established  a  holding company  liquidity target  equal  to its estimated annual pre-tax interest expense
and  common  shareholder  dividends  (currently approximately $1.1  billion). TRV’s holding company
liquidity  of  $1.68  billion at  December  31,  2016  exceeded this target and  it is the opinion of the
Company’s management  that  these  assets are sufficient to meet TRV’s current liquidity requirements.

TRV  is  not dependent on dividends or other forms of repatriation from its foreign operations to

support its  liquidity  needs. U.S. income  taxes  have  not been recognized on $358 million of the
Company’s foreign  operations’  undistributed earnings as of December 31, 2016, as such earnings are
intended to be permanently  reinvested  in  those  operations. Furthermore, taxes paid to foreign
governments  on  these  earnings  may be  used as credits against the  U.S. tax on dividend distributions  if
such earnings  were to  be distributed  to  the holding company. The amount of undistributed earnings
from  foreign  operations  and  related  taxes on  those undistributed earnings were not material to the
Company’s financial  position  or liquidity at December 31, 2016.

TRV  has a shelf registration statement filed with  the Securities and Exchange Commission that

expires  on June  17,  2019 which permits  it to issue securities from time to time.  TRV also has  a
$1.0  billion line  of  credit  facility with a  syndicate  of financial institutions that expires on June 7, 2018.
This line of credit  also supports  TRV’s  $800 million commercial  paper program, of which $100 million
was outstanding at December 31, 2016.  TRV  is  not  reliant on its commercial paper program to meet  its
operating  cash flow needs.

The Company utilized  uncollateralized  letters of credit issued by major banks with an aggregate
limit  of approximately  $179 million, to provide a portion  of the capital needed  to support its obligations
at Lloyd’s at  December  31,  2016. 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.

116

On December  15, 2017,  the Company’s $450 million, 5.75% senior notes  will mature. The

Company  may refinance this maturing  debt through  funds generated internally  or, depending on market
conditions, through  funds  generated externally.

Operating  Activities

Net  cash  flows  provided  by  operating  activities were $4.20  billion, $3.43 billion  and $3.69 billion  in

2016,  2015 and 2014,  respectively.  Cash  flows in  2016  reflected higher levels of collected premiums,
proceeds from  the  settlement  of a reinsurance dispute as  discussed in more detail in note 16 of notes
to the consolidated  financial  statements  and  lower  income tax payments, partially offset  by higher  levels
of  payments  for claims and  claim adjustment expenses, general and administrative  expenses and
commission expenses. The  higher  level  of  payments for claims and claim adjustment expenses in 2016
included  the  Company’s  $524  million  payment related to the settlement of the PPG Industries,  Inc.
litigation as described  in  more  detail  in  the ‘‘Asbestos  Claims and Litigation’’ section. Cash flows in
2015 included the  Company’s  $579  million payment related to the settlement of the Asbestos Direct
Action  Litigation  as  described  in more  detail in note  16 of notes to  the consolidated financial
statements and  a lower  level of  net investment income, partially offset by a  higher  level of collected
premiums and a  lower contribution  to  the Company’s  qualified domestic pension plan. Cash flows  in
2014 primarily  reflected higher  levels  of  payments for  claims and claim adjustment expenses, general
and  administrative  expenses  and commission expenses, as well as higher income tax payments, partially
offset  by higher  levels  of  collected  premiums. These increases in 2014 included the impact of the
Company’s acquisition of The  Dominion of  Canada General Insurance Company (Dominion). In 2016,
2015 and  2014,  the  Company  voluntarily made  contributions totaling $200 million, $100 million and
$200 million, respectively,  to its qualified  domestic  pension plan. The qualified domestic pension  plan
was 101%  and 96%  funded at  December 31, 2016 and 2015, respectively.

Investing  Activities

Net  cash  used in  investing  activities  was $1.46  billion  in 2016,  compared with net cash provided  by

investing  activities  of  $317  million  and  $206  million  in 2015 and 2014, respectively. The Company’s
consolidated total  investments  at December 31, 2016 increased by $18 million, or less than 1% from
year-end 2015, primarily reflecting net  cash  flows provided by  operating activities, largely offset by
common share  repurchases,  a decrease  in  the unrealized appreciation of investments and dividends
paid to shareholders.  The  Company’s  consolidated total investments at December  31, 2015 decreased
by  $2.79 billion, or  4%  from year-end  2014, primarily reflecting a decrease  in the unrealized
appreciation of  investments, common  share  repurchases and dividends paid to shareholders, partially
offset  by net cash  flows provided  by operating activities.

The Company’s  investment portfolio is managed  to support its  insurance operations; accordingly,

the  portfolio  is  positioned  to meet obligations to  policyholders. As such,  the primary goals  of the
Company’s asset-liability management  process  are  to  satisfy the insurance liabilities and maintain
sufficient liquidity  to  cover fluctuations in  projected liability  cash flows. Generally, the expected
principal and  interest payments  produced  by the Company’s fixed maturity portfolio adequately fund
the  estimated runoff of the Company’s insurance  reserves.  Although this is not an exact cash flow
match  in  each period,  the substantial amount  by which the market value of the fixed maturity  portfolio
exceeds the value of  the net  insurance  liabilities, as  well as the positive cash flow from newly sold
policies  and the  large amount of  high quality liquid  bonds, contributes to the Company’s ability to  fund
claim payments  without having  to  sell  illiquid assets or access credit facilities.

Financing  Activities

Net  cash  flows  used  in  financing activities were $2.81 billion, $3.73 billion and $3.81 billion in 2016,

2015 and  2014, respectively. The totals in each year primarily reflected common share repurchases  and

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dividends to  shareholders,  partially  offset  by the proceeds from employee stock option exercises. The
total in 2016 also  included  the issuance  of 3.75% senior  notes  for net proceeds of $491  million and the
payment  of  the  Company’s  $400 million, 6.25% senior  notes at maturity. The total in 2015 also
included  the  issuance  of  4.30%  senior  notes  for net proceeds of $392 million and the payment of the
Company’s $400 million, 5.50% senior  notes at maturity. Common share repurchases  in 2016,  2015  and
2014 were $2.47  billion, $3.22  billion  and $3.33  billion, respectively.

Debt Transactions.

2016. On May  11,  2016,  the Company issued $500 million  aggregate  principal  amount of 3.75%
senior notes  that will  mature on May  15, 2046.  The net proceeds  of  the issuance,  after the  deduction of
underwriting  and  other  expenses, totaled approximately $491  million.  Interest on  the senior  notes is
payable semi-annually in  arrears on  May 15 and November  15.  Prior  to  November 15, 2045,  the senior
notes  may be  redeemed, in  whole or  in  part, at the Company’s  option, at any  time or  from time  to
time, at  a redemption price  equal  to  the  greater of (a)  100%  of  the  principal  amount  of  any senior
notes  to  be redeemed or (b) the  sum  of  the present values  of  the remaining  scheduled payments of
principal and  interest  on  any  senior  notes to be redeemed  (exclusive  of  interest accrued  to  the  date of
redemption) discounted to  the date  of  redemption  on a semi-annual basis (assuming  a  360-day year
consisting of  twelve 30- day  months)  at  the  then current  Treasury  Rate (as defined  in the  senior  notes),
plus  20 basis  points.  On  or  after  November 15, 2045, the senior notes  may  be  redeemed,  in whole or  in
part,  at the Company’s option, at  any  time or from time  to  time, at  a  redemption  price equal  to 100%
of  the principal amount  of any  senior  notes to  be redeemed, plus  accrued  and  unpaid  interest  to, but
excluding,  the  redemption date.

On June  20,  2016, the  Company’s  $400 million, 6.25% senior  notes matured  and  were fully  paid.

2015. On August 25, 2015,  the Company issued  $400  million  aggregate  principal amount of 4.30%

senior notes  that will  mature on August  25,  2045. The  net proceeds of the  issuance, after  original
issuance  discount  and  the  deduction  of  underwriting expenses  and commissions  and  other  expenses,
totaled  approximately  $392  million.  Interest on  the senior  notes is payable  semi-annually in  arrears on
February 25 and August 25.  Prior to  February 25,  2045, the  senior  notes may be  redeemed, in  whole  or
in part,  at the  Company’s  option,  at  any  time or from time to  time, at a redemption  price  equal to  the
greater of (a) 100%  of the  principal  amount  of any senior  notes to be redeemed  or  (b) the  sum  of the
present  values  of the  remaining scheduled  payments of principal and  interest on  any  senior  notes to be
redeemed (exclusive  of  interest accrued  to the date of redemption) discounted to  the date of
redemption on  a semi-annual  basis (assuming a  360-day  year  consisting  of  twelve 30-day months)  at the
then  current  Treasury  Rate  (as  defined  in the senior notes),  plus 25 basis  points.  On  or  after
February 25,  2045, the  senior notes may  be  redeemed, in  whole or in  part, at  the Company’s option,  at
any time or from  time  to  time,  at a redemption price equal  to 100%  of  the principal  amount of  any
senior notes  to be  redeemed.

On December 1,  2015, the  Company’s $400 million, 5.50% senior  notes matured  and  were  fully

paid.

Dividends. Dividends  paid  to  shareholders were  $757  million,  $739  million  and $729 million in
2016,  2015 and  2014,  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  24, 2017, the Company  announced  that its  Board of Directors

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declared a regular  quarterly  dividend  of  $0.67  per  share, payable March  31, 2017, to shareholders of
record on  March 10,  2017.

Share Repurchases. The  Company’s Board of Directors  has approved common share repurchase
authorizations under  which  repurchases  may  be made from time to time  in the open market, pursuant
to pre-set trading  plans meeting  the  requirements  of Rule 10b5-1  under the Securities Exchange Act of
1934,  in private  transactions  or  otherwise. The authorizations  do not have a stated expiration date. The
timing and actual  number  of  shares  to  be repurchased in the future will depend on a variety of factors,
including the  Company’s  financial position, earnings, share price, catastrophe losses, maintaining capital
levels commensurate with the  Company’s desired ratings  from independent rating agencies,  funding of
the  Company’s  qualified  pension  plan,  capital requirements of the  Company’s operating subsidiaries,
legal requirements, regulatory constraints, other investment  opportunities (including mergers and
acquisitions and  related financings),  market conditions and other factors.  The  following table
summarizes repurchase  activity  in  2016  and remaining repurchase capacity at  December 31, 2016.

(in millions, except per share amounts)
Quarterly Period Ending

Number of
shares
purchased

Cost of shares
repurchased

Average price paid
per share

Remaining capacity
under share repurchase
authorization

March  31, 2016 . . . . . . . . . . . . . . . . .
June  30,  2016 . . . . . . . . . . . . . . . . . .
September  30,  2016 . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . .

5.1
4.9
4.7
6.6

Total . . . . . . . . . . . . . . . . . . . . . . .

21.3

$ 550
550
550
750

$2,400

$108.46
112.12
117.25
113.54

112.82

$2,784
2,234
1,684
934

934

From  the inception  of the  first  authorization on May  2, 2006 through December 31, 2016, the
Company  has repurchased a cumulative  total of 476.8 million shares for a total cost of $30.07 billion,  or
an  average  of  $63.06  per  share.

In  2016,  2015  and  2014,  the  Company acquired 0.6 million, 0.7 million and 0.7  million shares,
respectively,  of common stock  from  employees as treasury  stock primarily to cover payroll withholding
taxes in connection  with  the vesting  of  restricted stock  unit awards and performance share awards, and
shares used by  employees to  cover the  price of certain  stock options that were exercised.

Capital Resources

Capital resources reflect  the overall  financial  strength  of  the Company and its ability to borrow
funds  at  competitive  rates and raise  new capital to meet its needs. The following table summarizes the
components of  the Company’s capital  structure  at  December 31, 2016 and 2015.

(at December 31, in millions)

Debt:

Short-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  unamortized  fair value adjustments and debt issuance costs . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016

2015

$

550
5,911
(24)

6,437

$

500
5,861
(17)

6,344

Shareholders’  equity:

Common stock and retained earnings, less treasury  stock . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . .

23,976
(755)

23,755
(157)

Total shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,221

23,598

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29,658

$29,942

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Total  capitalization at December  31, 2016 was $29.66  billion, $284 million lower than at

December 31, 2015,  primarily  reflecting  the impact  of common share repurchases  totaling $2.40 billion
under  the  Company’s  share repurchase  authorization, a  decrease in net unrealized appreciation of
investments of  $559  million  and  shareholder dividends of $762 million, largely offset by net income  of
$3.01  billion.

The following  table  provides  a  reconciliation of total capitalization  to total capitalization excluding

net  unrealized gains  on  investments:

(at December 31, dollars in millions)

2016

2015

Total  capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: net  unrealized  gain on  investments,  net of taxes . . . . . . . . . . . . . . . . . . . . .

$29,658
730

$29,942
1,289

Total  capitalization excluding  net  unrealized gains  on investments . . . . . . . . . . .

$28,928

$28,653

Debt-to-total capital  ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debt-to-total capital  ratio  excluding net unrealized gains  on investments . . . . . .

21.7%

22.3%

21.2%

22.1%

The debt-to-total  capital ratio excluding net unrealized gain on investments  is calculated  by
dividing  (a)  debt  by  (b)  total  capitalization  excluding net  unrealized gains and  losses on investments,
net  of taxes. Net  unrealized  gains  and  losses on  investments can  be significantly impacted by both
interest  rate movements and other economic  factors.  Accordingly, in  the opinion of the Company’s
management, the  debt-to-total capital  ratio calculated on  this basis provides another useful  metric for
investors  to understand  the  Company’s  financial  leverage position. The Company’s  ratio of debt-to-total
capital (excluding  after-tax  net  unrealized investment gains) of  22.3%  at December 31, 2016 was within
the  Company’s target  range of 15% to  25%.

Credit Agreement. The  Company is a party to a five-year, $1.0 billion revolving credit agreement
with a  syndicate  of financial  institutions  that expires  on June 7, 2018.  Terms of  the credit  agreement  are
discussed in  more detail in note 8 of  notes to  the consolidated financial statements.

Shelf  Registration. The  Company has filed a universal shelf registration  statement with  the
Securities and Exchange  Commission  that expires on  June  17,  2019 for  the potential  offering  and  sale
of  securities.  The  Company may  offer  these securities  from  time  to time at  prices  and on  other terms
to be determined  at  the  time  of offering.

Share Repurchase  Authorization. At December 31, 2016, the Company had  $934 million  of
capacity remaining under its share  repurchase authorization  approved by  the  board of directors.

Contractual  Obligations

The following table  summarizes,  as  of  December  31,  2016, the  Company’s future  payments  under

contractual obligations and estimated  claims and claim-related payments. The table  excludes  short-term
obligations and includes  only liabilities  at December  31,  2016  that are expected  to  be  settled  in cash.

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 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

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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
related  to  claims and  claim-related payments  has unavoidable estimation uncertainty.

The contractual  obligations  at December 31, 2016 were  as follows:

Payments Due by Period
(in millions)

Debt

Total

Less than
1 Year

1 - 3 Years

3 - 5 Years

After
5 Years

Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debentures . . . . . . . . . . . .

$ 6,000
361

$

Total debt principal . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest

6,361
5,579

Total long-term  debt  obligations(1) . . . . . . . .

11,940

Operating  leases(2) . . . . . . . . . . . . . . . . . . . . . .

605

Purchase obligations

Information  systems  administration and

maintenance  commitments(3) . . . . . . . . . . . .
Other  purchase commitments(4) . . . . . . . . . . .

Total purchase  obligations . . . . . . . . . . . . . . . .

181
128

309

Long-term  unfunded  investment  commitments(5) .

1,600

Estimated claims and  claim-related payments

450
—

450
353

803

147

62
46

108

348

Claims  and claim  adjustment  expenses(6) . . . . .
Claims  from large  deductible policies(7) . . . . . .
Loss-based  assessments(8) . . . . . . . . . . . . . . . .
Reinsurance  contracts accounted  for  as

deposits(9) . . . . . . . . . . . . . . . . . . . . . . . . .
Payout  from  ceded funds withheld(10) . . . . . . .

45,864
—
169

2
122

9,416
—
34

—
20

Total estimated  claims and claim-related

$ 1,000
—

$ 500
—

$ 4,050
361

1,000
592

1,592

218

100
47

147

487

10,686
—
52

2
11

500
514

1,014

140

19
26

45

518

5,722
—
19

—
10

4,411
4,120

8,531

100

—
9

9

247

20,040
—
64

—
81

payments . . . . . . . . . . . . . . . . . . . . . . . . . . .

46,157

9,470

10,751

5,751

20,185

Liabilities related  to  unrecognized tax

benefits(11) . . . . . . . . . . . . . . . . . . . . . . . . . .

534

534

—

—

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,145

$11,410

$13,195

$7,468

$29,072

(1) The Company’s $107  million  remaining aggregate principal amount of 6.25%  fixed-to-floating  rate

debentures  bear  interest at  an  annual rate of 6.25% from the date of issuance  to,  but excluding,
March  15,  2017 and  at  a rate of three-month  LIBOR plus 2.215% thereafter. The  table above
includes interest  payments  through the scheduled  maturity date of March 15, 2037. Interest
payments beginning  March  15, 2017 through March 15, 2037 were calculated using the three-
month  LIBOR  rate  as  of  December 31, 2016.

See note 8 of  notes to  the  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.

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(2) Represents  agreements entered  into  in the ordinary  course of  business to  lease  office  space,

equipment  and furniture. Future sublease  rental income aggregating approximately $4 million will
partially  offset these  commitments.

(3) Includes  agreements with  vendors  to purchase system software administration and maintenance

services.

(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.

(5) Represents  estimated timing  for  fulfilling unfunded  commitments for private equity limited

partnerships and  real estate partnerships.

(6) The amounts  in ‘‘Claims and  claim  adjustment  expenses’’ in the table above  represent the

estimated timing  of future  payments for  both  reported and unreported  claims incurred and related
claim adjustment expenses, gross  of reinsurance recoverables, excluding structured settlements
expected to be paid  by annuity companies.

The Company has  entered  into  reinsurance  agreements to  manage its exposure  to losses and
protect  its capital as  described in  note 5  of  notes to  the consolidated financial statements.

In  order to  qualify for  reinsurance accounting, a reinsurance agreement must indemnify the insurer
from  insurance  risk,  i.e.,  the agreement must transfer  amount and timing risk. Since the timing and
amount of  cash  inflows  from such  reinsurance agreements  are  directly related to the underlying
payment  of  claims and  claim adjustment expenses  by the  insurer,  reinsurance  recoverables  are
recognized in  a manner  consistent  with the liabilities  (the estimated liability for claims and claim
adjustment  expenses) relating  to the underlying reinsured contracts. The  presence of any feature
that  can  delay  timely reimbursement  of  claims by  a reinsurer results  in the reinsurance contract
being accounted  for  as  a deposit rather  than reinsurance. The assumptions used in  estimating  the
amount and timing  of  the  reinsurance  recoverables  are  consistent with those used  in estimating  the
amount and timing  of  the  related  liabilities.

The estimated future cash inflows  from the Company’s reinsurance contracts that qualify for
reinsurance  accounting  are  as  follows:

(in millions)

Total

Less than
1 Year

1 - 3 Years

3  - 5  Years

After
5  Years

Reinsurance recoverables . . . . . . . . . . . . . . . . .

$4,913

$659

$801

$516

$2,937

The Company  manages  its  business  and evaluates  its  liabilities for  claims  and claim adjustment
expenses on a  net  of reinsurance  basis. The  estimated  cash flows  on  a net  of  reinsurance basis  are
as follows:

(in millions)

Total

Less than
1 Year

1 -  3 Years

3 - 5 Years

After
5  Years

Claims  and claim  adjustment expenses, net . .

$40,951

$8,757

$9,885

$5,206

$17,103

For  business  underwritten  by  non-U.S.  operations,  future cash flows related to reported and
unreported claims  incurred and related  claim adjustment expenses were translated at  the spot  rate
on  December  31,  2016.

The amounts  reported in  the table above and in the table of reinsurance recoverables above are
presented on  a nominal  basis and have  not  been adjusted to reflect the  time value of money.
Accordingly, the  amounts  above will differ from the Company’s balance sheet  to the extent that
the  liability  for claims  and  claim  adjustment expenses  and  the related reinsurance recoverables

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have  been  discounted  in the  balance sheet.  See note 1 of notes to the consolidated financial
statements.

(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.

The estimated timing  of  the payment of the  contractholder payables and  the collection of
contractholder  receivables  for workers’ compensation policies is presented below:

(in millions)

Total

Less than
1 Year

1 - 3 Years

3  - 5  Years

After
5  Years

Contractholder  payables/receivables . . . . . . . . .

$4,609

$1,169

$1,296

$689

$1,455

(8) The amounts  in  ‘‘Loss-based  assessments’’ relate to  estimated  future payments of  second-injury

fund  assessments  which  would  result from payment of current claim liabilities. Second injury funds
cover the  cost of  any  additional  benefits  for aggravation of a  pre-existing condition.  For  loss-based
assessments, the  cost is shared by the  insurance industry and self-insureds, funded  through
assessments to insurance  companies and self-insureds based  on  losses.  Amounts relating  to  second-
injury fund assessments  are included in  ‘‘other liabilities’’  in the  consolidated balance sheet.

(9) The amounts  in  ‘‘Reinsurance contracts accounted for  as deposits’’ represent estimated future

nominal  payments  for  reinsurance agreements that  are  accounted  for  as deposits.  Amounts  payable
under  deposit  agreements  are  included in ‘‘other liabilities’’  in  the  consolidated balance  sheet.

(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 $534 million. Offsetting  these liabilities are deferred tax  assets of  $491 million  associated  with
the  temporary  differences that  would exist if  these positions become  realized.

The above table  does  not include an analysis of liabilities  reported  for  structured  settlements  for

which the Company has  purchased annuities  and  remains  contingently  liable in  the event of  default by
the  company  issuing  the annuity. The Company  is  not reasonably  likely to  incur material future
payment  obligations  under  such agreements. In addition, the  Company  is  not  currently  subject to any
minimum  funding requirements for  its  qualified pension plan.  Accordingly,  future  contributions are  not
included  in  the foregoing table.

Dividend  Availability

The Company’s  principal insurance  subsidiaries  are  domiciled in  the State of Connecticut.  The

insurance holding  company laws of Connecticut applicable  to  the  Company’s  subsidiaries  requires
notice  to, and approval  by, the  state insurance  commissioner  for  the  declaration  or  payment  of  any
dividend that,  together  with other distributions  made within the preceding twelve  months,  exceeds the

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greater of 10% of  the  insurer’s  statutory  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 $3.69 billion is available by
the  end of 2017  for  such dividends to  the  holding company, TRV, without prior approval of the
Connecticut  Insurance Department.  The Company may choose to accelerate the timing within 2017
and/or  increase  the  amount of  dividends  from its  insurance subsidiaries in 2017, which could result  in
certain  dividends being  subject to  approval by  the Connecticut Insurance Department.

In  addition  to  the regulatory  restrictions  on the availability of  dividends that  can be paid by the

Company’s U.S. insurance subsidiaries,  the  maximum amount of dividends that may  be paid to the
Company’s shareholders  is limited,  to  a  lesser  degree, by  certain covenants contained in its line  of
credit  agreement  with  a  syndicate  of financial  institutions that require the Company to maintain a
minimum  consolidated net  worth as  described in  note 8 of notes to the consolidated financial
statements.

TRV  is  not dependent on dividends or other forms of repatriation from its foreign operations to

support its  liquidity  needs. The  undistributed earnings of the Company’s  foreign operations are not
material  and are  intended to  be permanently  reinvested in those  operations.

TRV  and its two  non-insurance  holding company  subsidiaries received  dividends of $3.05 billion,

$3.75  billion  and  $4.10 billion  from  their U.S.  insurance subsidiaries in 2016, 2015 and 2014,
respectively.

Pension  and Other Postretirement Benefit  Plans

The Company sponsors  a  qualified  non-contributory defined  benefit  pension plan (the Qualified
Plan), which covers substantially  all  U.S.  domestic  employees and provides  benefits primarily under  a
cash balance  formula.  In  addition,  the  Company  sponsors a  nonqualified defined benefit pension plan
which covers certain  highly-compensated employees, pension plans for employees  of its foreign
subsidiaries, and  a postretirement  health and  life insurance benefit plan for employees satisfying certain
age and service  requirements and  for  certain retirees.

The Qualified Plan  is  subject  to  regulations under the Employee Retirement Income Act of  1974
as amended  (ERISA), which  requires  plans to meet  minimum standards of  funding and requires such
plans  to  subscribe to  plan termination  insurance through the Pension  Benefit Guaranty Corporation
(PBGC).  The  Company does not  have  a minimum funding requirement for  the Qualified Plan for  2017
and  does  not  anticipate  having a  minimum funding requirement in  2018. The Company has  significant
discretion in making  contributions above those necessary to satisfy the minimum funding requirements.
In  2016, 2015 and  2014,  there was no minimum funding requirement for the Qualified Plan. In 2016,
2015 and  2014, the  Company voluntarily made  contributions totaling $200 million, $100 million and
$200 million, respectively,  to the Qualified Plan.  In determining future contributions,  the Company will
consider  the  performance of the plan’s  investment portfolio, the effects of interest rates on the
projected  benefit obligation of the plan  and  the Company’s other capital requirements. The Company
has not  determined whether  or not  additional voluntary  funding will  be made in 2017. However, the
Company  currently  believes, subject to  actual  plan performance and funded status at the time, that  it
may make voluntary  pension contributions of approximately  $75 million to $100 million annually
beginning  in  2017.

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In  2016,  the  Company  began using  a  full yield-curve approach  in the estimation of the service  and

interest  cost  components  of net  periodic  benefit costs  for its qualified and nonqualified domestic
pension  plans and  its  domestic postretirement benefit plans. For a full  discussion of the  rationale and
impact of  this  change in approach,  see  note 14  of  notes to the  consolidated financial statements.

At December 31, 2016  and 2015, the Company updated its mortality assumptions  for estimating  its

qualified pension  plan  liabilities utilizing new mortality improvement scales issued by the Society of
Actuaries. The  adoption  of the  new  mortality  improvement  scales decreased the projected benefit
obligation by  $32 million  and $57 million  at December 31, 2016 and 2015, respectively.

The Qualified Plan  assets  are  managed  to maximize  long-term total return while maintaining an
appropriate  level of  risk.  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
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  2017, the Company plans to apply an expected  long-term rate of
return  on  plan assets of 7.00%,  the same  rate  that  was applied in 2016. The  expected rate of return
reflects the Company’s  current  expectations with regard to  long-term returns in  the capital markets,
taking into account the  pension  plan’s  asset  allocation targets, the historical performance and current
valuation  of U.S. and international equities, and the level of long  term interest rate and inflation
expectations.  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.

For  further  discussion of the  pension  and  other postretirement benefit plans, see note 14  of notes

to the consolidated  financial  statements.

Risk-Based  Capital

The NAIC  has  an  RBC requirement for most  property and casualty insurance companies, which

determines  minimum  capital  requirements and is intended to  raise the level of  protection for
policyholder  obligations. The  Company’s U.S.  insurance subsidiaries are subject to these NAIC RBC
requirements  based on laws  that have  been  adopted by individual states. These requirements subject
insurers having  policyholders’ surplus  less  than  that required by the RBC  calculation to varying degrees
of  regulatory action, depending on the  level  of  capital inadequacy. Each of the Company’s U.S.
insurance subsidiaries  had  policyholders’ surplus at December 31, 2016 significantly above the level at
which any RBC regulatory  action would  occur.  Regulators in the jurisdictions in which the Company’s
foreign  insurance subsidiaries  are  located require  insurance companies to maintain  certain levels of
capital depending  on,  among  other  things,  the type and  amount of insurance policies in force. Each  of
the  Company’s foreign insurance  subsidiaries had  capital significantly above their  respective regulatory
requirements  at  December 31, 2016.

Off-Balance Sheet Arrangements

The Company has  entered  into certain  contingent obligations for guarantees related to selling
businesses to  third  parties, certain  investments,  third-party loans related to certain investments, certain
insurance policy obligations  of  former  insurance subsidiaries and various other indemnifications. See
note  16  of notes  to  the consolidated  financial statements. The Company does not expect these
arrangements will have a  material effect on  the Company’s financial position, changes in financial
position,  revenues  and  expenses, results of  operations, liquidity, capital expenditures or capital
resources.

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CRITICAL  ACCOUNTING ESTIMATES

The Company considers  its  most  significant accounting estimates to be those applied  to claims  and

claim adjustment expense reserves  and  related reinsurance recoverables, investment  valuation  and
impairments,  and  goodwill  and  other  intangible  assets impairments.

Claims  and Claim Adjustment  Expense  Reserves

Gross  claims  and  claim  adjustment expense reserves  by product  line were as follows:

(in millions)

General  liability . . . . . . . . . . . . . . . . . . . .
Commercial  property . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Commercial  multi-peril
Commercial  automobile . . . . . . . . . . . . . .
Workers’ compensation . . . . . . . . . . . . . .
Fidelity  and  surety . . . . . . . . . . . . . . . . . .
Personal automobile . . . . . . . . . . . . . . . .
Homeowners  and personal—other . . . . . .
International  and  other . . . . . . . . . . . . . .

Property-casualty . . . . . . . . . . . . . . . . .
Accident and health . . . . . . . . . . . . . . . . .

Claims  and claim  adjustment  expense

December 31, 2016
IBNR

Case

Total

Case

December  31, 2015
IBNR

Total

$ 4,951
752
1,807
2,190
10,322
242
1,852
622
2,740

25,478
20

$ 6,925
357
1,935
1,178
8,786
323
1,038
468
1,441

22,451
—

$11,876
1,109
3,742
3,368
19,108
565
2,890
1,090
4,181

47,929
20

$ 5,588
715
1,888
2,068
10,269
229
1,710
601
2,808

25,876
23

$ 7,120
397
1,750
1,253
8,470
475
842
399
1,690

22,396
—

$12,708
1,112
3,638
3,321
18,739
704
2,552
1,000
4,498

48,272
23

reserves . . . . . . . . . . . . . . . . . . . . . .

$25,498

$22,451

$47,949

$25,899

$22,396

$48,295

Gross  claims  and  claim  adjustment expense reserves  at December 31, 2016 decreased by

$346 million  from  December 31, 2015.  This  decrease primarily reflected the impacts of (i) payments
related  to  operations  in runoff, including  the Company’s $524 million payment related to the  settlement
of  the PPG Industries, Inc. litigation  as  described in  more detail in the ‘‘Asbestos Claims and
Litigation’’ section  and  (ii) net  favorable  prior year reserve development, partially  offset by  the impacts
of  (iii) higher volumes of insured exposures and (iv)  loss cost trends for the current accident year.

Asbestos  and environmental reserves are included in the General liability, Commercial multi-peril
and  International  and  other lines  in the  foregoing summary table. Asbestos  and environmental reserves
are discussed separately;  see  ‘‘Asbestos  Claims  and Litigation’’, ‘‘Environmental Claims and Litigation’’
and  ‘‘Uncertainty Regarding Adequacy  of  Asbestos  and Environmental Reserves.’’

Claims  and claim  adjustment  expense reserves represent management’s estimate  of the ultimate

liability  for unpaid  losses  and loss adjustment expenses for claims that have been reported  and claims
that  have been  incurred  but  not yet reported (IBNR)  as of the balance sheet  date. Claims and claim
adjustment  expense  reserves  do not represent an exact calculation of liability, but instead represent
management  estimates,  primarily utilizing  actuarial expertise and projection methods. These estimates
are expectations of what  the ultimate  settlement  and administration of claims will cost upon final
resolution in the  future,  based on the Company’s  assessment of  facts and circumstances  then known,
review  of historical settlement  patterns, estimates of trends  in claims severity and frequency, expected
interpretations  of legal  theories of liability and other factors. In establishing gross claims and claim
adjustment  expense  reserves, the Company  also considers salvage and subrogation.  Estimated recoveries
from  reinsurance are included in ‘‘Reinsurance  Recoverables’’ as an asset  on the Company’s
consolidated balance  sheet.  The claims and  claim  adjustment  expense reserves are reviewed regularly by
qualified actuaries employed by the  Company.

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The process of estimating  claims  and  claim  adjustment expense reserves involves a high degree of
judgment and  is  subject  to a  number  of  variables. These variables  can be affected by both internal  and
external  events, such as changes in  claims handling procedures, changes in individuals involved in the
reserve  estimation  process,  economic  inflation,  legal  trends and legislative changes, among others. The
impact of  many of  these items  on  ultimate costs for claims and  claim adjustment expenses is difficult to
estimate.  Estimation  difficulties  also  differ  significantly  by product line due to differences in claim
complexity, the  volume  of  claims,  the  potential severity of individual claims, the determination of
occurrence  date  for  a claim  and  reporting lags  (the  time  between the occurrence  of the policyholder
event and when  it  is  actually reported  to  the insurer).  Informed judgment is applied throughout  the
process,  including  the  application  of  various individual experiences and expertise to multiple sets of
data  and  analyses.  The  Company continually refines  its estimates in  a regular  ongoing process as
historical loss  experience  develops  and  additional  claims are reported and  settled. The Company
rigorously  attempts to consider all significant facts and circumstances known at the time claims and
claim adjustment expense reserves  are  established. Due to  the inherent uncertainty underlying these
estimates  including,  but  not limited  to,  the  future settlement environment, final  resolution of the
estimated liability  for claims and  claim  adjustment expenses may be higher or lower than  the related
claims  and claim adjustment expense  reserves at the  reporting date. Therefore, actual paid losses, as
claims  are settled  in the  future,  may  be  materially  different than  the amount currently  recorded—
favorable or  unfavorable.

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, including  the
interpretation of  policy terms and  conditions, 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; estimating  the  impact  of demand surge, infrastructure disruption, fraud, the effect of mold
damage  and business  interruption costs;  and  reinsurance collectibility. The  timing  of a catastrophe,  such
as at or near  the end of a  reporting  period,  can  also affect the information  available to the Company in
estimating reserves  for that  reporting  period. The estimates  related to catastrophes are adjusted as
actual claims  emerge.

A  portion of the  Company’s gross  claims  and  claim adjustment expense reserves (totaling
$1.91  billion  at  December  31,  2016) are  for  asbestos and environmental claims and related litigation.
While the ongoing review  of asbestos  and environmental claims and associated liabilities considers the
inconsistencies  of  court  decisions  as to  coverage,  plaintiffs’ expanded theories of liability  and the risks
inherent in complex  litigation and other uncertainties, in the opinion of the  Company’s management, it
is possible that the  outcome  of the  continued  uncertainties  regarding these claims could result in
liability  in  future periods  that differs from  current  insurance  reserves by an  amount that could  be
material  to the  Company’s future operating results.  See the preceding discussion of  ‘‘Asbestos Claims
and  Litigation’’ and  ‘‘Environmental  Claims and Litigation.’’

General  Discussion

The process for  estimating  the liabilities for  claims and claim adjustment expenses  begins with  the

collection and analysis  of claim data.  Data  on individual  reported claims, both current and historical,
including paid  amounts  and individual  claim adjuster estimates, are grouped by  common characteristics

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(components) and evaluated by actuaries in  their analyses of ultimate claim liabilities. Such data is
occasionally supplemented with  external  data  as available and when appropriate. The process of
analyzing reserves  for  a component  is  undertaken on a regular  basis, generally quarterly, in light of
continually  updated  information.

Multiple  estimation  methods are available  for the analysis of ultimate claim liabilities. Each
estimation  method  has its own  set  of  assumption variables and its  own advantages and disadvantages,
with no  single  estimation  method  being  better than  the others in all  situations and no one set of
assumption variables  being meaningful  for all  product line components. The relative strengths and
weaknesses of  the particular  estimation  methods  when applied to a particular group of claims  can also
change over time. Therefore,  the actual  choice of estimation method(s)  can change  with each
evaluation. The  estimation  method(s)  chosen are those that are believed to produce the most reliable
indication  at  that particular  evaluation  date for the  claim liabilities being evaluated.

In  most cases, multiple  estimation  methods will be  valid for the particular facts and circumstances

of  the claim  liabilities being evaluated.  This will result in a range of  reasonable estimates for any
particular  claim  liability. The Company  uses such range  analyses to back test whether previously
established  estimates  for  reserves by  reporting  segments  are  reasonable, given available information.
Reported values found to be closer  to  the endpoints of a range of reasonable estimates are subject to
further detailed  reviews.  These  reviews  may  substantiate the validity of  management’s recorded
estimate  or  lead to a  change  in  the  reported estimate.

The exact  boundary  points  of these ranges are more  qualitative than quantitative in nature, as  no
clear line  of  demarcation exists  to determine  when the  set of underlying assumptions  for an estimation
method switches  from being  reasonable  to unreasonable. As a result, the Company does not believe
that  the endpoints  of these  ranges  are  or  would be  comparable across companies. In addition, potential
interactions  among  the different  estimation  assumptions  for different product lines make the
aggregation of  individual  ranges a highly  judgmental and inexact process.

Property-casualty  insurance policies  are either written on a ‘‘claims-made’’ or on an ‘‘occurrence’’

basis. Claims-made  policies  generally  cover, subject  to requirements  in individual policies,  claims
reported during the  policy period. Policies that  are  written on an occurrence  basis require  that the
insured  demonstrate  that  a loss  occurred in the policy period,  even if the insured reports the loss many
years  later.

Most general liability  policies  are  written on  an  occurrence basis. These policies are subject to
substantial loss  development  over  time  as facts and circumstances change in the years following the
policy  issuance.  The  occurrence form,  which accounts for much of the  reserve development in asbestos
and  environmental exposures, is  also  used to provide coverage for construction general liability,
including construction  defect. Occurrence-based  forms of insurance for general liability exposures
require substantial  projection  of loss trends, which can be influenced by a number  of factors, including
future inflation, judicial interpretations and societal  litigation trends (e.g., size of jury awards and
propensity of  individuals to pursue litigation), among  others.

A  basic premise in  most  actuarial analyses is that past patterns demonstrated in the  data will
repeat themselves in  the future,  absent  a  material  change in the associated risk factors discussed below.
To  the  extent  a  material  change  affecting  the ultimate claim liability is known, such change is estimated
to the extent  possible  through an analysis of internal company data and, if  available and when
appropriate, external data.  Such a measurement is specific to the  facts and circumstances of the
particular  claim  portfolio  and the known  change  being evaluated.  Significant structural changes to the
available data, product mix or organization  can  materially impact  the reserve estimation process.

Informed judgment  is applied  throughout the  reserving  process. This includes the application  of

various  individual  experiences  and expertise to  multiple  sets of data  and analyses.  In  addition to

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actuaries,  experts  involved with  the reserving process also include underwriting and claims personnel
and  lawyers, as  well as other  company  management.  Therefore, management may have to  consider
varying  individual viewpoints  as part  of  its  estimation of claims and claim adjustment expense reserves.
It  is  also likely  that during periods of  significant  change, such as  a merger, consistent application of
informed judgment  becomes  even more  complicated and difficult.

The variables  discussed above in this general discussion have different impacts on  reserve

estimation  uncertainty  for  a given product line, depending on the length of  the claim tail, the reporting
lag,  the impact of  individual claims and  the complexity of the  claim process for a given product line.

Product lines are  generally  classifiable as  either  long  tail  or short  tail, based on the average length

of  time  between  the event  triggering  claims under a policy  and the final resolution of those claims.
Short  tail claims are reported  and settled quickly, resulting in less estimation variability. The longer  the
time to  final  claim  resolution, the  greater the  exposure  to estimation risks and  hence the greater the
estimation  uncertainty.

A  major component of the claim  tail is the reporting lag. The reporting lag, which is the time

between  the event  triggering  a  claim and the reporting of the  claim  to the insurer, makes estimating
IBNR  inherently  more uncertain.  In  addition, the greater the reporting lag, the  greater the  proportion
of  IBNR to  the  total  claim  liability  for  the  product line.  Writing  new products with material reporting
lags  can  result  in  adding  several  years’  worth  of  IBNR claim exposure before the reporting  lag exposure
becomes  clearly  observable,  thereby  increasing  the risk associated  with estimating the liabilities for
claims  and claim adjustment expenses  for such products. The most extreme example of claim liabilities
with long reporting  lags  are  asbestos  claims.

For  some  lines, the  impact of  large individual claims can be material  to the analysis. These lines
are generally  referred  to  as  being  ‘‘low  frequency/high severity,’’ while  lines without this ‘‘large claim’’
sensitivity  are referred  to as ‘‘high  frequency/low  severity.’’  Estimates of  claim liabilities for low
frequency/high  severity lines  can  be  sensitive to the impact of a small number of potentially large
claims.  As  a  result,  the  role  of  judgment  is  much greater for these reserve  estimates. In contrast, for
high  frequency/low  severity lines  the  impact of individual claims is relatively minor and the range of
reasonable reserve  estimates  is  likely  narrower  and  more stable.

Claim complexity  can  also greatly  affect  the estimation process  by impacting the number  of
assumptions needed  to  produce  the  estimate, the  potential stability of the underlying data and claim
process,  and the ability to  gain  an understanding  of  the data. Product  lines with greater claim
complexity, such as  for  certain  surety  and  construction exposures, have inherently greater  estimation
uncertainty.

Actuaries  have to  exercise  a considerable  degree  of  judgment in  the evaluation of  all  these factors

in their  analysis of reserves.  The  human  element in the  application of actuarial judgment is unavoidable
when faced with  material uncertainty.  Different  actuaries may choose different assumptions  when  faced
with such uncertainty,  based on their  individual backgrounds, professional experiences and areas of
focus.  Hence,  the estimates  selected  by  the various actuaries may differ materially from  each other.

Lastly, significant structural changes to the available data, product mix or organization can also

materially impact the  reserve estimation  process. Events  such  as mergers  increase the inherent
uncertainty  of  reserve  estimates for  a period of time, until stable  trends re-establish  themselves within
the  new organization.

Risk  factors

The major causes  of material uncertainty (‘‘risk  factors’’) generally will vary for each product line,
as well  as  for each separately  analyzed  component of the product  line. In a few cases, such risk factors
are explicit assumptions  of  the estimation method, but in  most cases,  they are implicit. For  example, a

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method may  explicitly  assume that  a  certain  percentage of claims will close each  year, but will implicitly
assume  that  the legal interpretation  of  existing contract language  will remain unchanged. Actual results
will likely vary  from expectations for  each of  these  assumptions, causing actual paid losses, as claims
are settled  in the  future, to be different  in amount  than  the  reserves being  estimated currently.

Some  risk  factors  will affect  more  than  one product line. Examples  include changes in  claim
department practices, changes  in settlement  patterns, regulatory and legislative actions, court actions,
timeliness of  claim reporting, state  mix  of  claimants and degree of claimant fraud. The extent of the
impact of  a  risk  factor will  also  vary  by  components within a product line. Individual risk factors are
also  subject to  interactions with  other  risk  factors within product line components.

The effect  of a  particular  risk factor on estimates of claim liabilities cannot  be isolated in most
cases.  For example,  estimates  of potential  claim  settlements may be impacted by the risk associated
with potential  court  rulings, but  the  final  settlement agreement typically  does not delineate how much
of  the settled amount is due to  this  and  other factors.

The evaluation  of  data  is  also  subject to distortion from extreme events or structural shifts,

sometimes in unanticipated  ways.  For  example, the timing of claims payments in one geographic region
may be impacted  if claim adjusters  are  temporarily reassigned  from that region to help settle
catastrophe  claims  in  another  region.

While some  changes  in  the claim environment are sudden in nature (such  as a new court ruling

affecting  the  interpretation  of all contracts in  that  jurisdiction), others  are  more evolutionary.
Evolutionary  changes  can occur  when  multiple factors  affect final  claim values, with the uncertainty
surrounding  each factor  being  resolved  separately, in stepwise  fashion. The  final  impact  is not known
until  all steps  have  occurred.

Sudden  changes generally cause  a  one-time  shift  in claim liability estimates, although there may  be

some  lag in reliable  quantification of  their  impact. Evolutionary changes generally cause a series of
shifts  in  claim  liability estimates,  as  each  component of the evolutionary change becomes evident and
estimable.

Actuarial methods  for  analyzing  and estimating  claims  and claim adjustment expense reserves

The principal  estimation  and  analysis methods utilized  by the Company’s actuaries to evaluate
management’s existing estimates  for  prior accident periods are the paid loss development method, the
case incurred  development method,  the  Bornhuetter-Ferguson (BF)  method,  and average value analysis
combined  with  the reported  claim  development method.  The BF method  is usually utilized for more
recent accident  periods,  with  a  transition to  other  methods as the underlying claim data becomes more
voluminous and  therefore more credible.  These estimation and analysis methods are typically referred
to as  conventional actuarial methods.  (See note 7 of notes to the  consolidated financial statements for
an  explanation  of these methods).

While the  Company utilizes  these conventional  actuarial methods to estimate the claims liability
for its  various businesses, Company  actuaries  evaluating a particular  component for a product line may
select  from  the full range  of  methods  developed  within the casualty  actuarial profession.  The
Company’s actuaries are also continually monitoring  developments  within the profession for  advances in
existing techniques  or  the  creation  of new techniques that might  improve current and future estimates.

Some  components  of  a product line  may  be susceptible  to infrequent large claims or not be subject

to conventional methods. In such cases,  the  Company’s actuarial analysis  will  isolate  such components
for review. The reserves excluding such large  claims are generally  analyzed using the conventional

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methods described  above. The reserves  associated  with  large claims are then analyzed utilizing various
methods,  such  as:

• 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.

• Utilizing  individual  claim adjuster  estimates of the large claims,  combined  with continual

monitoring  of the aggregate  accuracy  of  such  claim  adjuster  estimates.  (This monitoring may
lead to  supplemental  adjustments  to the aggregate of such claim estimates.)

• Utilizing  historic longer-term average ratios of large  claims to small claims, and  applying such

ratios to  the  estimated ultimate small claims  from conventional  analysis.

• Ground-up analysis of the  underlying exposure (typically used for asbestos  and environmental).

The results  of  such methodologies are subjected  to various reasonability and diagnostic tests,

including implied incurred-loss-to-earned-premium  ratios, non-zero claim severity trends and
paid-to-incurred loss  ratios. An  actual  versus expected analysis is also performed comparing actual  loss
development to  expected development  embedded within management’s best estimate. Additional
analyses may  be  performed based on  the results  of  these  diagnostics, including the  investigation of
other  actuarial  methods.

The methods  described above are  generally utilized  to evaluate management’s estimate  for prior
accident periods. For the  initial  estimate of the current accident year, however, the available claim  data
is typically insufficient to  produce  a  reliable  indication.  As  a result, the  initial  estimate  for an accident
year is  generally  based on an  exposure-based  method using either  expected losses or a loss ratio
projection method.  The  loss ratio method 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  stability and
consistency of the  individual  accident  year  estimates.

Management’s  estimates

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
analyses, management determines whether  its  ultimate claim liability estimates should be changed. In
doing  so, it  must evaluate  whether  the  new  data provided represents credible actionable information  or
an  anomaly  that  will  have  no effect  on  estimated ultimate claim liability. For  example, as described
above,  payments  may  have  decreased  in  one geographic region due to fewer claim adjusters being
available to  process  claims.  The  resulting claim payment patterns would be analyzed to determine
whether or not  the change in payment pattern represents a  change in ultimate claim liability.

Such  an  assessment  requires considerable  judgment.  It is frequently not possible to determine

whether a change in  the data is an anomaly until  sometime after the event. Even if  a change is
determined  to  be permanent, it is not always possible to reliably determine the extent of  the change
until  sometime later. The overall  detailed analyses  supporting such an effort can  take several  months  to
perform  as the  underlying  causes of the  trends  observed  need  to be evaluated, which may require the
gathering  or  assembling  of data not  previously available.  It may also include interviews with experts
involved with the underlying  processes. As a result, there can be a time lag between the emergence  of a
change and  a  determination  that the  change should  be reflected  in the Company’s estimated claim
liabilities. The  final estimate selected  by management in a reporting period  is based on these various
detailed  analyses of  past data,  adjusted  to  reflect  any  new actionable information.

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The Audit  Committee  of  the Board  of  Directors is responsible for providing  oversight of  reserving

propriety, and annually  reviews  the  process by which the Company establishes reserves.

Discussion of Product Lines

The following  section details  reserving considerations and common risk factors by product line.
There are  many  additional  risk factors  that may impact ultimate  claim costs.  Each risk factor presented
will have  a different  impact  on  required  reserves. Also, risk  factors can  have offsetting or compounding
effects on  required reserves.  For example,  in workers’  compensation, the use of  expensive medical
procedures  that result  in medical  cost  inflation may  enable workers to return  to work faster, thereby
lowering  indemnity  costs.  Thus,  in almost all cases, it is impossible to discretely measure the effect  of a
single  risk  factor and  construct a meaningful  sensitivity  expectation.

In  order to  provide  information  on  reasonably  possible  reserving changes by product line, the
historical changes  in year-end  claims  and claim adjustment expense  reserves over a one-year period are
provided  for  the U.S. product  lines.  This  information  is provided for both the Company and the
industry  for the  nine  most recent  years,  and is based on the most recent publicly available data for the
reported line(s) that most closely  match  the individual product  line being  discussed. These changes
were  calculated,  net of  reinsurance,  from statutory annual statement data found in Schedule P of those
statements, and  represent the  reported  reserve development on the beginning-of-the-year claim
liabilities  divided by the  beginning claim  liabilities,  all accident years combined, excluding non-defense
related  claim adjustment expense.  Data  presented for  the Company includes history for the entire
Travelers group (U.S.  companies only),  as required by the statutory reporting instructions  promulgated
by  state  regulatory authorities for  Schedule  P. Comparable data  for non-U.S. companies is not available.

General  Liability

General liability  is  generally considered a long  tail  line, as it takes a relatively long period of time

to finalize and settle claims from a given  accident year. The speed of claim reporting and claim
settlement is  a  function  of  the  characteristics of claims,  including specific coverage provided, the
jurisdiction and specific policy  provisions such  as self-insured retentions, among others.  There  are
numerous components  underlying  the  general liability product line.  Some of these have relatively
moderate payment  patterns  (with  most  of  the claims  for a given accident year closed within five to
seven  years), while  others  can  have  extreme  lags in both reporting and payment of claims (e.g., a
reporting lag of  a  decade  or  more for  ‘‘construction defect’’ claims).

While the  majority  of  general  liability  coverages  are  written on an ‘‘occurrence’’ basis, certain

general liability coverages  (such  as  those covering management liability or professional  liability) are
typically insured  on  a  ‘‘claims-made’’  basis.

General liability  reserves  are  generally  analyzed as two components: primary and  excess/umbrella,

with the  primary  component  generally analyzed separately  for bodily  injury  and property damage.
Bodily  injury  liability payments  reimburse  the claimant for damages pertaining to physical  injury as a
result of  the policyholder’s legal obligation  arising  from  non-intentional acts such as negligence, subject
to the insurance  policy provisions. In  some  cases the damages can include future wage loss (which is a
function of future earnings power and wage inflation)  and future medical treatment costs. Property
damage  liability  payments result from  damages to the claimant’s private property arising from the
policyholder’s legal obligation  for non-intentional acts.  In most  cases, property damage losses are a
function of costs as of  the loss  date, or  soon  thereafter.

In  addition,  sizable or  unique  exposures are reviewed separately.  These  exposures include asbestos,

environmental,  other  mass torts, construction  defect  and large unique accounts that would otherwise
distort  the analysis. These  unique  categories often require a very high degree of judgment and require
reserve  analyses that do  not rely on conventional  actuarial  methods.

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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 is included in the 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 policy limits, the full amount  of the
policy  limit is  available to  pay  claims  and  the amounts paid for defense costs have no  contractual limit.

This line is  typically the largest  source  of  reserve estimate uncertainty in the United States
(excluding assumed  reinsurance contracts covering the same risk). Major contributors to this reserve
estimate  uncertainty include  the  reporting lag (i.e.,  the length of time between the event triggering
coverage and  the  actual  reporting of  the  claim),  the number of parties involved in the underlying tort
action,  whether the  ‘‘event’’  triggering  coverage  is  confined to only one time period or  is spread over
multiple time  periods,  the potential  dollars  involved (in the individual claim  actions), whether such
claims  were  reasonably  foreseeable  and  intended to  be covered at the  time the  contracts were written
(i.e., coverage dispute potential),  and  the  potential for mass claim actions. Claims with longer reporting
lags  result  in  greater estimation  uncertainty. This is especially true for alleged claims with a latency
feature, particularly where courts  have  ruled  that coverage is spread over  multiple policy years, hence
involving  multiple  defendants (and  their  insurers and  reinsurers) and multiple policies (thereby
increasing  the  potential  dollars  involved  and  the underlying settlement complexity). Claims with long
latencies also increase the  potential  recognition lag (i.e., the lag between writing a type  of policy in a
certain  market  and  the recognition  that  such policies  have potential  mass tort and/or latent claim
exposure).

The amount of  reserve  estimate uncertainty also varies  significantly by component for the  general

liability  product line.  The  components  in this product line with  the longest  latency, longest reporting
lags, largest potential dollars  involved  and greatest claim settlement complexity  are asbestos and
environmental.  Components that include latency, reporting lag and/or complexity  issues, but to a
materially lesser  extent than  asbestos  and environmental, include construction defect and other  mass
tort actions. Many components  of general liability are not subject to material latency or claim
complexity  risks  and hence  have  materially less  uncertainty than the previously  mentioned components.
In  general, components  with shorter  reporting lags, fewer  parties involved in settlement negotiations,
only one policy  potentially triggered  per  claim, fewer  potential settlement dollars, reasonably
foreseeable  (and stable) potential hazards/claims and no mass tort potential result in much less reserve
estimate  uncertainty than  components  without  those  characteristics.

In  addition  to  the conventional  actuarial methods  mentioned in the general discussion section, the

company utilizes various  report  year  development and S-curve  methods for the construction defect
components of  this product line. The  Construction Defect report year development analysis is
supplemented  with  projected claim counts and average  values for IBNR  claim  counts.  For  components
with greater lags  in  claim reporting,  such as excess and  umbrella components of this product line, the
company relies  more  heavily  on the BF  method than  on the  paid and case incurred  development
methods.

Examples of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect  the

required  general liability reserves (beyond those included in the general discussion section) include:

General liability  risk factors

• Changes  in claim handling philosophies

• Changes  in policy  provisions  or court interpretation of such provisions

• New  or  expanded theories of  liability

• Trends  in jury awards

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• Changes  in  the  propensity to  sue, in general with specificity to particular issues

• Changes  in  the  propensity to  litigate rather than  settle  a claim

• Changes  in  statutes  of  limitations

• Changes  in  the  underlying  court system

• Distortions from losses resulting from large  single accounts or single  issues

• Changes  in  tort  law

• Shifts  in  lawsuit  mix  between federal and  state courts

• Changes  in  claim adjuster office  structure (causing distortions in the data)

• The potential  impact  of inflation on loss  costs

• Changes  in  settlement  patterns

General liability  book of  business  risk  factors

• Changes in policy provisions (e.g., deductibles, policy limits,  endorsements)

• Changes  in  underwriting  standards

• Product  mix  (e.g.,  size of  account, industries insured,  jurisdiction mix)

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 general liability (excluding asbestos and
environmental), a  1%  increase (decrease) in  incremental paid loss development for each future
calendar year could result  in a 1.5%  increase (decrease)  in claims and claim  adjustment expense
reserves.

Historically, the  one-year change in  the  reserve estimate for this product line,  excluding estimated

asbestos and environmental  amounts,  over the  last nine years has varied from (cid:4)8% to (cid:4)3%
(averaging  (cid:4)5%) for  the Company,  and  from  (cid:4)5% to (cid:4)1% (averaging (cid:4)3%) 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. General liability reserves  (excluding
asbestos and environmental) represent  approximately 22%  of the Company’s total claims and claim
adjustment  expense  reserves.

The Company’s  change in  reserve  estimate  for this product line, excluding estimated  asbestos and

environmental  amounts,  was (cid:4)4%  for 2016, (cid:4)3% for 2015 and (cid:4)5% for 2014. The 2016 change
primarily  reflected better  than expected  loss experience for both  primary and excess coverages for
accident years 2015  and  prior. The 2015 change  primarily reflected  better than expected loss experience
for excess coverages for  accident years  2005 through  2013. The 2014 change primarily reflected better
than expected loss experience for  excess  coverages  for accident years 2008 through 2012.

Commercial  Property

Commercial  property is  generally considered a short tail line with a simpler and  faster  claim
reporting and  adjustment process than  liability coverages, and less uncertainty in  the reserve setting
process  (except  for more complex business interruption claims). It is generally viewed as a moderate
frequency,  low to  moderate severity  line, except for  catastrophes and coverage related to large
properties. The claim  reporting and settlement process for property coverage claim reserves  is generally
restricted to  the insured  and  the  insurer. Overall,  the claim liabilities for this line  create a low
estimation  risk,  except  possibly for  catastrophes  and  business interruption claims.

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Commercial  property reserves  are typically analyzed  in two components, one for catastrophic or

other  large  single  events, and  another  for  all other  events. Examples of common risk factors, or
perceptions thereof,  that could change  and,  thus,  affect the required property reserves (beyond those
included  in  the  general  discussion  section) include:

Commercial  property risk  factors

• Physical  concentration of policyholders

• Availability  and  cost of local  contractors

• For  the  more  severe  catastrophic events,  ‘‘demand surge’’  inflation, which refers to significant

short-term  increases in  building material  and labor costs due  to  a sharp  increase  in demand  for
those  materials  and services

• Local  building  codes

• Amount  of  time to return  property  to full usage (for business interruption claims)

• Frequency  of  claim re-openings on claims  previously closed

• Court interpretation of policy provisions  (such as occurrence definition, or wind versus flooding)

• Lags  in  reporting claims  (e.g.,  winter  damage  to  summer homes, hidden damage after an

earthquake, hail  damage  to roofs and/or equipment on roofs)

• Court  or  legislative  changes  to  the  statute of limitations

Commercial  property book of  business  risk factors

• Policy  provisions  mix  (e.g., deductibles, policy limits, endorsements)

• Changes  in  underwriting  standards

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
incremental paid loss  development for  each future calendar year could  result  in a 1.1% increase
(decrease) in  claims and claim  adjustment  expense  reserves.

Historically, the  one-year change in  the  reserve estimate for this product line over the last nine
years  has  varied  from  (cid:4)25% to  (cid:4)5%  (averaging (cid:4)16%) for the Company, and from (cid:4)14% to (cid:4)5%
(averaging  (cid:4)8%) 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 2%  of  the  Company’s total  claims  and claim
adjustment  expense reserves.

Since commercial  property is  considered a short tail  coverage,  the  one  year  change for commercial
property can  be  more volatile than that for  the longer tail product lines.  This is  due  to the  fact that  the
majority of the  reserve  for  commercial property relates to  the most  recent  accident  year,  which  is
subject to  the most uncertainty  for all  product  lines. This recent  accident  year uncertainty  is  relevant to
commercial property because  of weather-related events which, notwithstanding 2013 through 2016
experience, tend  to  be  concentrated in  the  second half of the  year, and  generally  are not  completely
resolved until  the following year. Reserve estimates associated with  major  catastrophes  may take  even
longer  to  resolve.  The  reserve  estimates  for this product  line are also  potentially subject  to  material
changes  due to  uncertainty in measuring  ultimate  losses for  significant catastrophes  such  as  the events
of  September 11, 2001,  Hurricane Katrina  and  Storm Sandy.

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The Company’s  change in  reserve  estimate  for this product line  was (cid:4)9% for 2016, (cid:4)21% for
2015 and  (cid:4)18%  for 2014.  The  2016  change primarily  reflected better than expected loss experience
related  to  non-catastrophe  losses  for  accident years  2014 and 2015. The 2015 change primarily reflected
better  than expected loss  experience related to catastrophe losses for  accident years 2011, 2012 and
2014,  and non-catastrophe  losses  for  accident years  2013 and 2014. The 2014 change primarily reflected
better  than expected loss  experience for  accident years 2010 through 2013, including catastrophe losses
from  Storm Sandy  for  accident  year  2012.

Commercial  Multi-Peril

Commercial  multi-peril  provides a combination of property and liability coverage typically for small

businesses and,  therefore, includes both  short and long tail  coverages. For property coverage, it
generally  takes  a relatively short  period  of time  to close claims,  while for the other coverages, generally
for the  liability coverages,  it  takes  a longer period of time to close claims.

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 small- to mid-sized  accounts, while the customer
profile for  general  liability  and  commercial property includes  larger customers.

See ‘‘Commercial property risk factors’’  and ‘‘General liability risk factors,’’ discussed above,  with

regard  to  reserving risk for commercial  multi-peril.

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 commercial multi-peril (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.

Historically, the  one-year change in  the  reserve estimate for this product line,  excluding estimated

asbestos and environmental  amounts,  over the  last nine years has varied from (cid:4)19% to 5%
(averaging  (cid:4)2%) for  the Company,  and  from  (cid:4)6% to (cid:4)1% (averaging (cid:4)3%) 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 multi-peril reserves  (excluding
asbestos and environmental  reserves)  represent approximately 8% of the  Company’s total  claims and
claim adjustment expense reserves.

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.

The Company’s change in  reserve estimate  for this product line  was 1% for 2016, (cid:4)1% for 2015
and  3% for 2014.  The 2016 change primarily reflected worse than expected loss experience for  property
coverages related  to  non-catastrophe  losses for  accident  year 2015. The 2015 change primarily reflected
better  than expected loss  experience for property coverages related to non-catastrophe  losses for
accident years 2012  and  2014. The 2014 change primarily reflected worse than expected loss experience
for liability  coverages  for accident years 2010 through  2013.

Commercial  Automobile

The commercial  automobile  product  line is a  mix of property and liability coverages and, therefore,

includes both  short and  long tail coverages. The  payments that  are  made  quickly typically pertain to
auto physical damage  (property) claims and property  damage (liability) claims. The payments  that take
longer  to  finalize and are more difficult  to estimate relate to bodily injury claims. In general, claim

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reporting lags  are  minor, claim  complexity  is  not a major issue, and the  line is viewed as high
frequency,  low to  moderate  severity.  Overall, the claim liabilities for this line create a moderate
estimation  risk.

Commercial  automobile  reserves  are  typically  analyzed in four components: bodily injury liability;
property damage liability;  collision claims; and comprehensive claims.  These last two components have
minimum  reserve  risk  and  fast payouts  and, accordingly, separate risk factors are not presented.

The Company utilizes  the  conventional  actuarial methods mentioned in the general discussion

above  in  estimating  claim liabilities for  this  line.  This  is  supplemented with detailed custom analyses
where needed.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect  the

required  commercial  automobile reserves (beyond those included in the  general discussion  section)
include:

Bodily  injury  and  property  damage  liability risk factors

• Trends  in jury awards

• Changes in the underlying court system

• Changes  in  case  law

• Litigation trends

• Frequency  of  claims  with  payment capped  by policy limits

• Change in  average severity of  accidents, or proportion of severe accidents

• Changes  in  auto safety technology

• Subrogation  opportunities

• Changes  in  claim handling philosophies

• Frequency  of  visits  to health  providers

• Number  of medical procedures given during visits  to health providers

• Types  of health providers  used

• Types  of medical  treatments  received

• Changes  in  cost  of  medical treatments

• Degree  of patient  responsiveness  to  treatment

Commercial  automobile  book of  business  risk  factors

• Changes  in policy  provisions  (e.g., deductibles, policy limits,  endorsements, etc.)

• Changes  in mix  of  insured vehicles (e.g., long  haul trucks  versus local and smaller vehicles, fleet

risks  versus  non-fleets)

• Changes  in underwriting  standards

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 commercial automobile, 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.

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Historically, the  one-year change in  the  reserve estimate for this product line over the last nine

years  has  varied  from  (cid:4)7%  to 7% (averaging 0%) for  the Company,  and from (cid:4)3% to 6%
(averaging  0%) 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  automobile  reserves  represent approximately 7% of the Company’s total claims and claim
adjustment  expense  reserves.

The Company’s  change in  reserve  estimate for  this  product line  was (cid:4)1% for 2016, 0% for 2015

and  (cid:4)2%  for 2014.  The  2016  change  primarily  reflected better  than  expected loss  experience  for
accident years 2011  and  prior. The  2014  change  primarily reflected  better than expected loss experience
for accident  years  2011  and  2012.

Workers’ Compensation

Workers’  compensation  is  generally considered a long tail coverage, as  it takes  a relatively long
period of time to  finalize  claims from  a  given  accident year. While certain payments such as initial
medical treatment  or  temporary  wage  replacement  for the injured worker are made  quickly, some  other
payments  are made over the  course  of  several  years, such as awards for permanent partial injuries.  In
addition,  some payments  can run  as  long  as the  injured  worker’s life, such as permanent disability
benefits  and on-going  medical  care. Despite the possibility of long payment tails, the reporting lags are
generally  short,  payment  obligations  are  generally not complex, and most  of  the liability can be
considered high frequency  with moderate  severity.  The  largest  reserve risk generally  comes from the
low  frequency, high severity  claims  providing lifetime  coverage for medical  expense arising from a
worker’s  injury, as such claims are subject to greater  inflation risk. Overall, the claim liabilities for  this
line  create a somewhat greater than  moderate  estimation  risk.

Workers’  compensation  reserves  are typically analyzed in three components: indemnity  losses,

medical losses and claim adjustment  expenses.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect the

required  workers’ compensation  reserves (beyond  those included in the general discussion section)
include:

Indemnity risk factors

• Time  required to recover  from  the injury

• Degree  of available  transitional  jobs

• Degree  of legal  involvement

• Changes  in the  interpretations  and processes of the  administrative bodies that oversee workers’

compensation  claims

• Future wage  inflation for  states  that  index benefits

• Changes  in the  administrative  policies of second  injury funds

Medical risk factors

• Changes  in the  cost of  medical  treatments (including  prescription drugs) and underlying fee

schedules  (‘‘inflation’’)

• Frequency of  visits  to health  providers

• Number  of medical procedures given  during visits to  health providers

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• Types  of health providers  used

• Type of medical treatments received

• Use of preferred  provider networks and other medical cost  containment practices

• Availability  of  new  medical processes and equipment

• Changes  in  the  use  of pharmaceutical drugs, including drugs for pain management

• Degree  of patient  responsiveness  to  treatment

General workers’  compensation risk factors

• Frequency  of  reopening claims previously  closed

• Mortality  trends  of injured workers with lifetime benefits and  medical treatment

• Changes  in  statutory benefits

• Degree  of cost  shifting  between  workers’  compensation and health insurance, including

Medicare,  and  the impact, if  any, of the  Affordable Care  Act

Workers’ compensation book of business risk factors

• Product  mix

• Injury  type  mix

• Changes  in  underwriting  standards

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 workers’ compensation, a 1% increase
(decrease) in  incremental  paid  loss development for each future calendar year could result in  a 1.3%
increase (decrease)  in  claims  and claim  adjustment expense reserves.

Historically, the  one-year change in  the  reserve estimate for this product line over the last nine

years  has  varied  from  (cid:4)2%  to 1% (averaging (cid:4)1%) for the Company, and from (cid:4)2 to 1%
(averaging  (cid:4)1%) 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.
Workers’ compensation reserves  represent  approximately 40% of the  Company’s  total  claims  and  claim
adjustment  expense  reserves.

The Company’s  change  in  reserve  estimate for this product line  was (cid:4)2% for 2016, (cid:4)1% for  2015
and  0% for 2014.  The 2016 change  primarily reflected better than expected loss experience for  accident
years  2006  and prior as well as accident  years 2009, 2013 and 2015.  The 2015 change primarily  reflected
better  than expected loss  experience for accident years 2006 and prior.

Fidelity  and  Surety

Fidelity is generally  considered a  short tail coverage. It  takes a relatively short period of time  to

finalize and  settle most fidelity claims. The  volatility of fidelity reserves is generally related to the  type
of  business of  the insured,  the size and  complexity  of the insured’s business operations,  amount of
policy  limit and  attachment  point of  coverage. The  uncertainty surrounding reserves for small,
commercial insureds  is  typically less  than the uncertainty for  large commercial  or financial  institutions.
The high frequency,  low  severity nature  of  small commercial fidelity losses provides for stability in  loss
estimates, whereas the  low  frequency,  high severity  nature of losses  for  large insureds results in a wider
range of  ultimate loss  outcomes.  Actuarial  techniques that rely on a stable pattern of loss development
are generally  not  applicable  to  low frequency, high severity claims.

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Surety  has  certain  components that  are generally considered  short  tail coverages with short
reporting lags,  although  large  individual  construction and commercial  surety contracts can result in a
long  settlement  tail,  based on  the length  and  complexity  of the construction project(s) or commercial
transaction being  insured. (Large construction  projects can take many years to complete.) The
frequency of losses in  surety  generally  correlates with economic cycles as  the primary cause  of surety
loss is  the inability  of  an  insured  to fulfill its contractual obligations. The Company actively seeks to
mitigate  this  exposure to  loss  through  disciplined risk selection, adherence to underwriting standards
and  ongoing  monitoring of  contractor  progress in significant construction projects. The volatility of
surety losses  is  generally related to  the  type of business performed by the insured, the type  of bonded
obligation,  the amount  of  limit exposed  to  loss  and  the amount  of assets available to the insurer to
mitigate  losses, such  as  unbilled  contract  funds, collateral, first  and  third party indemnity, and other
security  positions  of  an  insured’s  assets.  Certain classes of surety claims are very  high severity, low
frequency in nature.  These  can include  large construction contractors involved with  one or multiple
large, complex projects  as  well as certain large commercial surety exposures. Other  claim factors
affecting  reserve  variability  of surety  include  litigation related to  amounts  owed by  and due the insured
(e.g., salvage and  subrogation  efforts)  and  the results of financial restructuring  of an insured.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect  the
required  fidelity  and surety  reserves (beyond those included in the  general  discussion section) include:

Fidelity  risk  factors

• Type of business  of  insured

• Policy  limit  and  attachment points

• Third-party  claims

• Coverage litigation

• Complexity of  claims

• Growth  in insureds’  operations

Surety  risk  factors

• Economic trends, including  the  general level of construction activity

• Concentration  of reserves in a relatively few  large  claims

• Type of business  insured

• Type of obligation  insured

• Cumulative  limits of  liability for  insured

• Assets  available to mitigate loss

• Defective  workmanship/latent defects

• Financial  strategy of insured

• Changes  in statutory obligations

• Geographic spread of business

Fidelity  and Surety  book  of  business risk  factors

• Changes  in policy  provisions  (e.g., deductibles, limits, endorsements)

• Changes  in underwriting  standards

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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 fidelity and  surety, a 1% increase
(decrease) in  incremental  paid  loss development for each future calendar year could result in  a 1.4%
increase (decrease)  in  claims  and claim  adjustment expense reserves.

Historically, the  one-year change in  the  reserve estimate for this product line over the last nine
years  has  varied  from  (cid:4)36% to  (cid:4)6%  (averaging (cid:4)18%) for the Company, and from (cid:4)17% to (cid:4)2%
(averaging  (cid:4)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.  Fidelity
and  surety  reserves  represent approximately 1% of the  Company’s total claims  and  claim  adjustment
expense  reserves.

In  general,  developments  on single  large  claims (both adverse and favorable)  are a  primary  source

of  changes in  reserve estimates for  this  product line.

The Company’s  change  in  reserve  estimate for this product  line  was (cid:4)36% for 2016, (cid:4)30% for
2015 and  (cid:4)36%  for 2014.  The  2016  change primarily  reflected better than expected loss experience  in
the  fidelity and  surety  product line for  accident  years 2009 through  2015. The 2015 change primarily
reflected  better  than expected loss  experience in  the fidelity and surety product line  for accident years
2008 through 2014,  which  was partially  driven by a reduction in outstanding exposures related to the
financial crisis that  commenced in  2007.  The  2014  change primarily reflected better than expected loss
experience  in  the contract surety  product line for accident years 2012 and prior.

Personal  Automobile

Personal  automobile includes  both short  and long tail coverages. The payments that are made
quickly  typically  pertain  to  auto  physical  damage (property)  claims and property damage (liability)
claims.  The  payments that  take longer  to  finalize  and  are more difficult to estimate relate  to bodily
injury claims.  Reporting  lags are  relatively short and the claim settlement process for personal
automobile  liability  generally is the least complex  of  the liability products. It is generally viewed as  a
high  frequency, low to  moderate severity  product  line.  Overall, the claim  liabilities for this line create  a
moderate  estimation  risk.

Personal  automobile reserves  are typically analyzed in five components: bodily injury liability,

property damage liability,  no-fault losses, collision  claims and comprehensive claims.  These last two
components have  minimum reserve  risk  and fast payouts and, accordingly, separate factors are  not
presented.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect the
required  personal  automobile reserves  (beyond those  included in the general reserve discussion section)
include:

Bodily  injury  and  property  damage  liability risk factors

• Trends  in jury awards

• Changes  in the  underlying  court system and its philosophy

• Changes  in case  law

• Litigation trends

• Frequency of  claims  with  payment capped  by policy limits

• Change in  average severity of  accidents, or proportion of severe accidents

• Changes  in auto safety technology

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• Frequency  and severity  of  claims  involving distracted drivers and pedestrians

• Subrogation  opportunities

• Degree  of patient  responsiveness  to  treatment

• Changes  in  claim handling philosophies

No-fault  risk  factors (for selected  states  and time periods)

• Effectiveness  of no-fault laws

• Frequency  of  visits  to health  providers

• Number  of medical procedures given during visits  to health providers

• Types  of health providers  used

• Types  of medical  treatments  received

• Changes  in  cost  of  medical treatments

• Degree  of patient  responsiveness  to  treatment

Personal automobile book  of  business  risk  factors

• Changes  in  policy  provisions  (e.g., deductibles, policy limits,  endorsements, etc.)

• Changes  in  underwriting  standards

• Changes  in  the  use  of credit data  for rating and underwriting

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 personal automobile,  a 1% increase
(decrease) in  incremental  paid  loss development for each future calendar year could result in  a 1.1%
increase (decrease)  in  claims  and claim  adjustment expense reserves.

Historically, the  one-year change in  the  reserve estimate for this product line over the last nine

years  has  varied  from  (cid:4)4%  to 3% (averaging 1%) for  the Company,  and from (cid:4)3% to 1%
(averaging  (cid:4)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.
Personal automobile  reserves  represent  approximately  6% of  the Company’s total claims and claim
adjustment  expense  reserves.

The Company’s  change  in  reserve  estimate for this product  line  was 3%  for  2016, (cid:4)4% for 2015
and  1% for 2014.  The 2016 change  primarily reflected worse than expected loss experience for  liability
coverages for accident year  2015.  The  change for 2015 primarily  reflected  better  than expected loss
experience  for liability  coverages  for accident years  2012  through  2014.

Homeowners  and  Personal  Lines Other

Homeowners is  generally  considered a short tail coverage. Most payments are  related to the
property portion of  the  policy, where  the  claim  reporting and settlement process is generally  restricted
to the insured  and  the insurer. Claims on  property coverage are typically reported soon after the actual
damage  occurs,  although  delays of  several months are not unusual. The resulting settlement process  is
typically fairly  short  term, although  exceptions do exist.

The liability portion  of the  homeowners policy generates claims  which take  longer to  pay due to
the  involvement of  litigation and negotiation,  but with generally small reporting lags. Personal Lines

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Other  products include  personal umbrella  policies,  among others. See ‘‘general liability reserving risk
factors,’’ discussed  above,  for reserving  risk factors related to umbrella coverages.

Overall,  the line  is  generally high  frequency, low  to moderate severity (except for catastrophes),

with simple  to  moderate claim  complexity.

Homeowners  reserves are  typically analyzed  in two components: non-catastrophe  related losses  and

catastrophe  loss payments.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect  the

required  homeowners  reserves (beyond  those  included  in the general discussion section) include:

Non-catastrophe  risk factors

• Salvage opportunities

• Amount  of  time to return  property  to residential use

• Changes  in  weather  patterns

• Local  building  codes

• Litigation trends

• Trends  in jury awards

• Court  interpretation of  policy provisions  (such as occurrence definition, or wind versus flooding)

• Lags  in  reporting claims  (e.g.,  winter  damage  to  summer homes, hidden damage after an

earthquake, hail  damage  to roofs and/or equipment on roofs)

• Court  or  legislative  changes  to  the  statute of limitations

Catastrophe  risk  factors

• Physical  concentration of policyholders

• Availability  and  cost of local  contractors

• Local  building  codes

• Quality  of  construction  of  damaged  homes

• Amount  of  time to return  property  to residential use

• For  the  more  severe  catastrophic events,  ‘‘demand surge’’  inflation, which refers to significant

short-term  increases in  building material  and labor costs due  to  a sharp  increase  in demand  for
those  materials  and services

Homeowners book of business risk factors

• Policy  provisions  mix  (e.g., deductibles, policy limits, endorsements, etc.)

• Degree  of concentration  of  policyholders

• Changes  in underwriting  standards

• Changes  in the  use  of credit data  for rating and underwriting

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 homeowners  and personal lines other, a
1%  increase (decrease)  in incremental  paid loss  development  for each future calendar year  could  result
in a  1.1% increase (decrease) in claims  and  claim  adjustment expense reserves.

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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 (cid:4)17% to 3% (averaging  (cid:4)10%) for the
Company, and from  (cid:4)7%  to (cid:4)2%  (averaging (cid:4)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  2% of the Company’s  total  claims and claim  adjustment  expense  reserves.

This line combines both  liability and  property coverages; however, the majority  of the  reserves
relate  to property. While property is  considered  a short tail coverage, the  one year  change for  property
can be  more volatile than  that  for  the  longer tail  product  lines. This  is  due  to  the  fact that the  majority
of  the reserve  for  property  relates to  the  most recent accident year,  which  is subject  to the  most
uncertainty  for  all  product  lines.  This  recent  accident year uncertainty is relevant  to property  because  of
weather  related events which,  notwithstanding 2010 and  2011  experience,  tend  to  be concentrated in
the  second half  of the  year,  and generally  are  not completely  resolved  until the  following year.  Reserve
estimates  associated with  major catastrophes may take even longer to  resolve.

The Company’s change in reserve estimate for this product  line  (excluding  the  umbrella  line of
business) was 3%  for  2016, (cid:4)16% for  2015 and (cid:4)16% for 2014. The 2016 change primarily reflected
modestly worse  than expected  loss  experience for  liability coverages for  accident  years 2012 through
2014.  The  2015 change  primarily  reflected  better than  expected loss  experience  for  liability  coverages
for accident  years 2011 through  2014,  and for  non-catastrophe weather-related  losses  and  non-weather-
related  losses for  accident  year 2014.  The 2014 change primarily  reflected better  than expected loss
experience  for non-catastrophe  weather-related losses for  accident year  2013  and  for  catastrophe  losses
for accident  years 2011 through  2013.

International  and  Other

International and other includes  products written by the Company’s  international operations, as

well as  all  other  products  not  explicitly  discussed  above.  The principal  component  of  ‘‘other’’ claim
reserves  is assumed reinsurance written  on  an  excess-of-loss  basis,  which may  include reinsurance  of
non-U.S.  exposures, and  is  runoff business.

International and other claim liabilities result  from a mix  of  coverages,  currencies  and  jurisdictions/

countries. The common  characteristic  is  the need to  customize the  analysis  to  the individual
component, and the inability  to  rely  on  data characterizations  and  reporting requirements  in the  U.S.
statutory  reporting  framework.

Due  to  changes  in  the business  mix  for  this line  over  time, including  the  2013  acquisition of

Dominion, the  recently incurred claim  liabilities  are  relatively  shorter tail  (due  to both the products and
the  jurisdictions  involved, e.g.,  Canada, the Republic  of  Ireland and  the United Kingdom), while the
older liabilities  include  some from runoff operations that are extremely  long  tail (e.g.,  U.S.  excess
liabilities  reinsured  through  the London market, and several  underwriting pools  in runoff).  The  speed
of  claim reporting and  claim  settlement is  a function  of  the specific  coverage  provided, the jurisdiction,
the  distribution system  (e.g.,  underwriting pool  versus  direct) and  the  proximity  of  the  insurance  sale  to
the  insured hazard (e.g., insured and insurer located in different  countries).  In particular, liabilities
arising  from the  underwriting pools in  runoff may  result  in  significant  reporting  lags,  settlement  lags
and  claim  complexity,  due  to the need  to coordinate with  other  pool members or  co-insurers  through a
broker  or lead-insurer for  claim settlement purposes.

International reserves are  generally  analyzed by country and  general  coverage category

(e.g., General Liability in  Canada, Commercial  Property in  the United  Kingdom, etc.).  The  business  is
also  generally split  by direct versus assumed  reinsurance  for a  given  coverage. Where the  underlying

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insured  hazard is outside the United  States, the underlying coverages are generally similar to those
described under the Homeowners,  Personal Automobile, Commercial Automobile, General Liability,
Commercial  Property  and Surety  discussions  above,  taking into account differences in the legal
environment and  differences in  terms  and conditions. However,  statutory coverage differences  exist
amongst various  jurisdictions. For  example, in some jurisdictions there are  no aggregate policy limits  on
certain  liability  coverages.

Other  reserves,  primarily  assumed  reinsurance in runoff, are  generally analyzed  by program/pool,
treaty  type, and  general coverage  category  (e.g.,  General Liability—excess of  loss reinsurance). Excess
exposure requires the insured to  ‘‘prove’’ not only claims under the policy, but also the prior  payment
of  claims reaching  up to the  excess  policy’s attachment point.

Examples  of  common  risk  factors,  or perceptions thereof,  that  could change and,  thus, affect  the

required  International and  other  reserves (beyond  those included in the general discussion section, and
in the  Personal  Automobile,  Homeowners,  General Liability, Commercial Property, Commercial
Automobile and Surety discussions  above) include:

International  and  other  risk  factors

• Changes in claim handling procedures, including those of the primary carriers

• Changes  in  policy  provisions  or court interpretation of such provision

• Economic trends

• New  theories of liability

• Trends  in jury awards

• Changes  in  the  propensity to  sue

• Changes  in  statutes  of  limitations

• Changes  in  the  underlying  court system

• Distortions from losses resulting from large  single accounts or single  issues

• Changes  in  tort  law

• Changes  in  claim adjuster office  structure (causing distortions in the data)

• Changes  in  foreign  currency  exchange rates

International  and  other  book  of business  risk factors

• Changes  in  policy  provisions  (e.g., deductibles, policy limits,  endorsements, ‘‘claims-made’’

language)

• Changes  in underwriting  standards

• Product  mix  (e.g.,  size of  account, industries insured,  jurisdiction mix)

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 8%  of  the  Company’s total claims  and  claim adjustment expense reserves.

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International  and  other  represents a combination of  different product lines,  some of which are  in

runoff.  Comparative  historical information is not available for international product lines as insurers
domiciled outside  of  the United  States  do  not  file U.S.  statutory  reports. Comparative historical
information on  runoff business is  not  indicative  of reasonably  possible one-year changes in the reserve
estimate  for this  mix of  runoff  business.  Accordingly, the  Company has not included comparative
analyses for  International  and  other.

Reinsurance Recoverables

Amounts recoverable  from  reinsurers are estimated in  a  manner  consistent  with the  associated
claim liability. The  Company evaluates  and monitors the  financial condition of its reinsurers under
voluntary reinsurance arrangements  to  minimize its exposure to significant losses from  reinsurer
insolvencies.  In addition,  in  the  ordinary course of business, the Company becomes  involved in
coverage disputes with  its  reinsurers.  Some of these disputes could result  in lawsuits and arbitrations
brought by or  against  the  reinsurers  to  determine  the Company’s rights and obligations under the
various  reinsurance agreements. The  Company employs  dedicated specialists and aggressive strategies
to manage  reinsurance  collections and  disputes.

The Company has entered into a reinsurance contract in connection with a catastrophe bond
issued  by Long Point Re  III.  This contract meets the requirements to be  accounted for as reinsurance
in accordance with  guidance for  accounting for reinsurance contracts. The catastrophe bond is
described in more  detail in ‘‘Item  1—Business—Catastrophe Reinsurance.’’

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, applicable
coverage defenses  and  other  relevant  factors. Accordingly, the establishment  of reinsurance
recoverables  and the  related  allowance  for uncollectible reinsurance  recoverables is  also  an inherently
uncertain process  involving  estimates.  From  time to time,  as a result of the long-tailed  nature of the
underlying liabilities,  coverage complexities and  potential for disputes, the  Company considers the
commutation of  reinsurance contracts.  Changes  in estimated reinsurance recoverables and  commutation
activity could result  in  additional  income statement charges.

Recoverables  attributable  to structured settlements relate primarily to personal injury claims, of

which workers’ compensation claims  comprise a significant portion, for which the Company has
purchased annuities  and remains contingently liable in the event of a default by  the companies issuing
the  annuities.  Recoverables attributable  to mandatory pools and associations  relate primarily to
workers’  compensation  service  business.  These recoverables are supported by  the participating
insurance companies’  obligation  to pay  a  pro rata  share  based on each company’s voluntary market
share  of  written premium  in each state  in which it is a pool participant. In the event a  member of  a
mandatory  pool or  association  defaults  on its  share of the pool’s or association’s obligations, the other
members’  share of  such obligation increases  proportionally.

For  a  discussion of  a pending reinsurance  dispute pertaining to a portion of the Company’s

reinsurance recoverables,  see note 16  of  notes to  the consolidated financial statements.

Investment Valuation  and  Impairments

Valuation  of  Investments Reported at Fair  Value in Financial Statements

The Company’s estimates  of  fair value for  financial  assets and financial liabilities are based on  the

framework established  in  the fair value  accounting guidance. The  framework is based on the inputs
used  in  valuation, gives the  highest  priority to  quoted  prices in active markets and requires that
observable  inputs be  used  in the  valuations  when  available.

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The fair  value of a  financial instrument is the  estimated amount  at which  the instrument could be

exchanged in an  orderly transaction  between knowledgeable, unrelated, willing parties,  i.e., not in a
forced  transaction.  The  estimated fair  value of a financial instrument may differ from the  amount  that
could be realized if  the security was sold in an immediate sale, e.g., a forced transaction. Additionally,
the  valuation of  investments  is  more  subjective when markets are less liquid due to the lack of market
based  inputs, which  may  increase the  potential  that the  estimated fair value of an investment is not
reflective of the  price at  which an  actual  transaction would occur.

See note 4 of  notes to  the  consolidated financial statements for a further discussion of  the

determination  of fair value of investments.

Investment  Impairments

See note 1 of  notes to  the  consolidated financial statements for a discussion of  investment

impairments.

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.

Goodwill  and  Other  Intangible  Assets  Impairments

See note 1 of  notes to  the  consolidated financial statements for a discussion of  impairments of

goodwill and other intangible  assets.

OTHER  UNCERTAINTIES

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 consolidated financial  statements and
‘‘Item 1A—Risk  Factors.’’

FORWARD-LOOKING  STATEMENTS

This report  contains,  and  management  may make, certain ‘‘forward-looking statements’’ within  the
meaning of the Private  Securities  Litigation Reform Act of 1995.  All  statements, other than statements
of  historical  facts, may  be  forward-looking  statements. Words such  as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘likely,’’
‘‘anticipates,’’  ‘‘expects,’’  ‘‘intends,’’ ‘‘plans,’’ ‘‘projects,’’ ‘‘believes,’’ ‘‘estimates’’ and similar expressions
are used to  identify these  forward-looking statements.  These statements include, among other things,
the  Company’s statements  about:

• the  Company’s outlook  and its future  results of operations and financial condition (including,
among other things, anticipated premium  volume, premium  rates, margins, net  and  operating
income, investment  income  and  performance, loss  costs, return on  equity  and expected current
returns  and  combined ratios);

• share  repurchase  plans;

• future  pension plan  contributions;

• the  sufficiency  of the  Company’s asbestos and  other reserves;

• the  impact of emerging  claims issues as well as other  insurance and non-insurance litigation;

• the  cost  and  availability  of reinsurance coverage;

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• catastrophe losses;

• the  impact of investment,  economic (including inflation,  potential changes in tax law and rapid

changes  in  commodity  prices,  such as a significant  decline  in  oil  and  gas  prices,  as well as
fluctuations  in  foreign  currency exchange rates) and underwriting market conditions;  and

• strategic initiatives to improve  profitability and  competitiveness.

The Company cautions investors  that  such  statements are subject to risks and uncertainties, many

of  which  are difficult to  predict and  generally beyond  the Company’s control, that could cause actual
results  to  differ  materially from  those  expressed in,  or  implied or projected by, the forward-looking
information and  statements.

For  a  discussion of  some of  the  factors that  could cause actual results  to  differ,  see  ‘‘Item 1A—
Risk Factors’’  and  ‘‘Item 7—Management’s Discussion and Analysis  of  Financial Condition and  Results
of  Operations.’’

The Company’s  forward-looking statements  speak  only  as of the date of  this report or  as of the

date  they  are made, and  the  Company  undertakes no  obligation to update its forward-looking
statements.

Item 7A. QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET  RISK

Market  risk  is  the  risk  of loss  arising  from  adverse  changes in market rates and prices, such  as

interest  rates (inclusive of  credit  spreads),  foreign currency exchange rates and  other relevant market
rate or  price  changes. Market  risk  is directly influenced by the volatility and liquidity in  the markets in
which the related  underlying  assets  are  traded.  The following is a discussion of the Company’s primary
market risk exposures  and how those  exposures are managed as of  December 31, 2016.  The Company’s
market risk sensitive  instruments, including derivatives,  are primarily entered into for purposes other
than trading.

The carrying value  of  the  Company’s investment portfolio at December 31, 2016 and 2015 was
$70.49  billion  and  $70.47  billion, respectively,  of which 86% was  invested  in fixed maturity securities at
both dates. At December  31,  2016 and  2015, approximately 7.1% and  7.4%, respectively,  of the
Company’s invested assets were denominated in foreign  currencies. The  Company’s exposure  to equity
price risk is  not  significant. The Company has  no direct commodity risk and is not a party to any credit
default  swaps.

The primary  market  risks  to  the  investment  portfolio are interest rate risk and  credit risk
associated with  investments  in  fixed maturity securities. The portfolio duration is primarily managed
through  cash  market  transactions and  treasury futures transactions. For additional information
regarding  the  Company’s  investments, see notes  3  and  4  of  notes to the consolidated financial
statements as well  as  the  ‘‘Investment  Portfolio’’ and  ‘‘Outlook’’ sections of ‘‘Item 7—Management’s
Discussion  and  Analysis  of  Financial  Condition and Results of Operations.’’

The primary  market  risk for all of the Company’s debt is interest rate risk  at the time of

refinancing.  The  Company monitors  the interest rate environment and evaluates refinancing
opportunities  as  maturity dates approach. For additional  information regarding  the Company’s debt, see
note  8  of  notes  to the  consolidated financial statements as well as the  ‘‘Liquidity and Capital
Resources’’  section  of ‘‘Item  7—Management’s Discussion and Analysis of Financial Condition and
Results  of  Operations.’’

The Company’s foreign  exchange market risk exposure is concentrated in the Company’s invested
assets, insurance  reserves  and shareholders’ equity denominated  in foreign currencies. Cash  flows from

148

the  Company’s foreign operations  are  the  primary source of funds for the purchase of  investments
denominated in  foreign  currencies. The  Company purchases these investments primarily to fund
insurance reserves  and other  liabilities  denominated in the same currency, effectively reducing its
foreign  currency  exchange rate  exposure.  Invested  assets denominated in the Canadian dollar
comprised  approximately  4.4%  of  the  total  invested assets at both December 31, 2016 and 2015.
Invested  assets  denominated  in  the British  Pound Sterling comprised approximately 1.9% and  2.1%  of
total invested  assets  at  December  31,  2016  and 2015, respectively.  Invested assets denominated in other
currencies at December  31,  2016  and  2015 were not material.

There were  no other significant  changes in the Company’s primary market risk exposures or in
how  those exposures were  managed  for  the year  ended December 31, 2016 compared to the year ended
December 31, 2015.  The Company  does  not  currently anticipate significant changes in its primary
market risk exposures  or  in  how  those  exposures are managed in future reporting  periods based  upon
what  is known or expected to  be in  effect in future reporting periods.

SENSITIVITY  ANALYSIS

Sensitivity  analysis  is  defined as the measurement of  potential loss in future  earnings, fair values  or
cash flows of  market  sensitive  instruments resulting  from  one or more  selected hypothetical changes in
interest  rates and  other  market  rates  or  prices over a  selected period of time.  In  the Company’s
sensitivity  analysis model,  a  hypothetical  change in  market rates is selected that is expected to  reflect
reasonably possible near-term  changes  in those rates. ‘‘Near-term’’ means  a period  of time going
forward up  to one  year  from  the  date  of  the consolidated financial statements. Actual  results may differ
from  the  hypothetical change  in market  rates assumed in  this disclosure, especially since this  sensitivity
analysis  does  not  reflect  the results  of  any actions that would be taken by the Company to mitigate
such hypothetical losses  in  fair value.

Interest Rate  Risk

In  this sensitivity analysis model,  the  Company  uses fair values to measure its potential loss. The
sensitivity  analysis model  includes the  following  financial instruments entered into for  purposes other
than trading: fixed maturities,  non-redeemable  preferred stocks,  mortgage loans, short-term securities,
debt  and derivative financial  instruments. The primary market risk to the Company’s market sensitive
instruments is  interest  rate  risk  (inclusive of credit spreads). The sensitivity analysis model uses various
basis point  changes  in interest rates  to  measure the hypothetical change in fair value of financial
instruments included  in  the model.

For  invested assets with  primary  exposure to interest rate risk, estimates of portfolio duration and

convexity are used  to  model  the  loss  of  fair  value that would be expected to result from  a parallel
increase in interest  rates. Durations  on  invested assets are adjusted for call, put and interest rate reset
features. Durations on  tax-exempt securities are adjusted for  the fact that the yields on such securities
do  not normally  move  in  lockstep with  changes  in the  U.S. Treasury curve. Fixed  maturity portfolio
durations  are calculated on a  market  value weighted  basis, including accrued  interest,  using holdings  as
of  December 31, 2016 and 2015.

For  debt, the  change in  fair  value is determined by  calculating hypothetical December 31, 2016  and

2015 ending prices based  on  yields adjusted to  reflect  a 100 basis point change, comparing  such
hypothetical ending prices to actual ending prices,  and multiplying the difference by  the par or
securities  outstanding.

The sensitivity analysis  model used  by the  Company produces a  loss in fair value of market
sensitive  instruments  of approximately  $2.19  billion and $2.00 billion based on a 100  basis point
increase in interest  rates  at  December 31, 2016 and  2015, respectively.

149

The loss estimates  do  not take into  account the impact of possible interventions that the Company

might reasonably undertake in  order  to  mitigate  or  avoid losses that would result from  emerging
interest  rate trends.  In addition, the  loss  value only  reflects the  impact of an interest rate increase on
the  fair value  of the  Company’s financial instruments.

Foreign  Currency Exchange  Rate  Risk

The Company uses fair  values  of  investment securities to  measure its potential loss from foreign
denominated investments.  A hypothetical  10%  reduction in value of  foreign denominated investments is
used  to estimate the impact on the  market  value of the foreign denominated holdings.  The Company’s
analysis  indicates that  a hypothetical  10%  reduction in the value of foreign denominated investments
would  be  expected to  produce a loss  in  fair value  of  approximately $502  million  and $522 million  at
December 31, 2016  and 2015, respectively.

150

ITEM  8. FINANCIAL  STATEMENTS  AND SUPPLEMENTARY DATA

INDEX  TO  CONSOLIDATED FINANCIAL  STATEMENTS

Report of  Independent  Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Income  for  the  years ended December  31, 2016, 2015 and  2014 . . . . .
Consolidated  Statement  of Comprehensive  Income for the  years ended December 31, 2016, 2015
and  2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Balance Sheet at December 31,  2016  and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Changes  in  Shareholders’ Equity for the years ended December 31,

2016,  2015 and  2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Cash Flows  for  the years ended December 31, 2016, 2015 and 2014 . .
Notes  to Consolidated Financial  Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

152
153

154
155

156
157
158

151

Report  of Independent Registered Public  Accounting Firm

The Board of Directors  and Stockholders
The Travelers  Companies,  Inc.:

We have audited the  accompanying consolidated balance  sheet of The  Travelers Companies, Inc.

and  subsidiaries (the  Company)  as of  December  31, 2016 and  2015, 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, 2016. 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.

We conducted  our audits in  accordance with the  standards of the Public  Company Accounting
Oversight Board  (United States).  Those  standards require that we plan and perform the audit to obtain
reasonable assurance  about  whether  the  financial  statements are free of material misstatement. An
audit  includes  examining, on  a  test  basis,  evidence  supporting the amounts and  disclosures in the
financial statements. An  audit also  includes assessing the accounting principles used  and significant
estimates  made  by  management,  as  well  as  evaluating the overall  financial statement presentation. We
believe  that our audits provide a reasonable basis for  our opinion.

In  our  opinion,  the consolidated financial  statements referred to above present fairly, in all
material  respects, the financial position  of The  Travelers Companies,  Inc. and subsidiaries as of
December 31, 2016  and 2015, and  the  results of their operations and their  cash flows for each of the
years  in the  three-year  period  ended  December  31,  2016, in conformity with U.S.  generally accepted
accounting  principles.

We also have  audited,  in accordance with the standards of  the Public Company Accounting
Oversight Board  (United States),  The  Travelers  Companies, Inc. and subsidiaries’ internal control  over
financial reporting  as  of December  31,  2016, based  on  criteria established in Internal  Control—
Integrated Framework  (2013)  issued by  the Committee of Sponsoring Organizations  of  the Treadway
Commission (COSO), and our report  dated February 16, 2017 expressed an unqualified opinion on the
effectiveness  of the  Company’s  internal  control over  financial reporting.

/s/ KPMG LLP

KPMG  LLP

New York, New York
February 16, 2017

152

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

CONSOLIDATED  STATEMENT OF INCOME

(in millions, except per share amounts)

For the year ended December 31,

2016

2015

2014

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment gains(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,534
2,302
458
68
263

$23,874
2,379
460
3
99

$23,713
2,787
450
79
145

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,625

26,815

27,174

Claims  and expenses
Claims  and claim  adjustment  expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization  of  deferred  acquisition  costs . . . . . . . . . . . . . . . . . . . . . . .
General and  administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total claims and  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income  before income  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,070
3,985
4,154
363

23,572

4,053
1,039

13,723
3,885
4,094
373

22,075

4,740
1,301

13,870
3,882
3,964
369

22,085

5,089
1,397

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,014

$ 3,439

$ 3,692

Net income  per share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10.39

$ 10.99

$ 10.82

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 10.28

$ 10.88

$ 10.70

Weighted  average number  of  common  shares  outstanding

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

288.1

291.0

310.6

313.9

338.8

342.5

Cash dividends  declared  per common  share . . . . . . . . . . . . . . . . . . . . .

$

2.62

$

2.38

$ 2.15

(1) Total other-than-temporary  impairment (OTTI) losses were $(40) million, $(54) million and

$(22) million  for  the  years  ended  December 31,  2016, 2015 and 2014, respectively. Of  total OTTI,
credit  losses of  $(29)  million, $(52)  million  and $(26)  million  for the years ended December 31,
2016,  2015  and 2014,  respectively,  were recognized  in net  realized investment  gains. In addition,
unrealized  gains  (losses) from other  changes in total OTTI of $(11) million, $(2) million and
$4 million for the  years ended  December 31, 2016,  2015  and 2014, respectively, were recognized in
other  comprehensive income (loss) as part of changes  in net unrealized gains on  investment
securities having credit  losses recognized  in the  consolidated  statement of income.

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

153

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

CONSOLIDATED  STATEMENT OF  COMPREHENSIVE  INCOME

(in millions)

For the year ended December 31,

2016

2015

2014

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,014

$ 3,439

$3,692

Other  comprehensive income  (loss):
Changes in net  unrealized  gains  on investment securities:

Having  no  credit  losses  recognized  in  the  consolidated statement of

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Having  credit losses  recognized in  the  consolidated statement of income .
Net  changes in  benefit plan  assets  and  obligations . . . . . . . . . . . . . . . . . . .
Net  changes in  unrealized foreign  currency  translation . . . . . . . . . . . . . . . .

Other  comprehensive income  (loss) before  income  taxes . . . . . . . . . . .
Income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(883)
21
16
(41)

(887)
(289)

(1,020)
(14)
66
(461)

(1,429)
(392)

Other  comprehensive income  (loss), net  of taxes . . . . . . . . . . . . . . . . .

(598)

(1,037)

976
2
(494)
(289)

195
125

70

Comprehensive  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,416

$ 2,402

$3,762

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

154

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

CONSOLIDATED BALANCE  SHEET

(in millions)

At December 31,

2016

2015

Assets
Fixed  maturities,  available  for  sale,  at  fair value (amortized cost $59,650 and

$58,878) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities,  available for sale,  at  fair value (cost  $504 and $528) . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term  securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 60,515
732
928
4,865
3,448

$ 60,658
705
989
4,671
3,447

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70,488

70,470

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment  income accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance  recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded  unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred  acquisition  costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder  receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  intangible  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

307
630
6,722
8,287
589
1,923
465
4,609
3,580
268
2,377

380
642
6,437
8,910
656
1,849
296
4,374
3,573
279
2,318

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,245

$100,184

Liabilities
Claims  and claim  adjustment  expense  reserves . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned  premium  reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder  payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables  for  reinsurance  premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 47,949
12,329
4,609
273
6,437
5,427

$ 48,295
11,971
4,374
296
6,344
5,306

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77,024

76,586

Shareholders’  equity
Common stock  (1,750.0  shares  authorized;  279.6 and 295.9 shares  issued and

outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained  earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost  (489.5  and 467.6  shares) . . . . . . . . . . . . . . . . . . . . . . . . .

22,614
32,196
(755)
(30,834)

22,172
29,945
(157)
(28,362)

Total shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,221

23,598

Total liabilities  and  shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . .

$100,245

$100,184

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

155

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

CONSOLIDATED  STATEMENT OF CHANGES  IN SHAREHOLDERS’ EQUITY

(in millions)

For the year ended December 31,

2016

2015

2014

Common  stock
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee  share-based  compensation . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation  amortization  under  share-based  plans and other

$ 22,172
287

$ 21,843
133

$ 21,500
149

changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

155

196

194

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22,614

22,172

21,843

Retained  earnings
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,945
3,014
(762)
(1)

27,251
3,439
(744)
(1)

24,291
3,692
(735)
3

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32,196

29,945

27,251

Accumulated other  comprehensive  income (loss),  net of tax
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  comprehensive  income  (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Treasury stock,  at cost
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock  acquired—share  repurchase authorization . . . . . . . . . .
Net  shares  acquired related  to  employee  share-based  compensation

(157)
(598)

(755)

880
(1,037)

(157)

810
70

880

(28,362)
(2,400)

(25,138)
(3,150)

(21,805)
(3,275)

plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(72)

(74)

(58)

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(30,834)

(28,362)

(25,138)

Total shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 23,221

$ 23,598

$ 24,836

Common  shares  outstanding
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock  acquired—share  repurchase authorization . . . . . . . . . .
Net  shares  issued under employee share-based compensation plans . . .

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

295.9
(21.3)
5.0

279.6

322.2
(29.6)
3.3

295.9

353.5
(35.1)
3.8

322.2

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

156

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

CONSOLIDATED STATEMENT OF  CASH FLOWS

(in millions)

For the year ended December 31,

2016

2015

2014

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

$ 3,014

$ 3,439

$ 3,692

Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in income from other investments
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred  acquisition  costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claims and claim adjustment expense reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned  premium  reserves
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(68)
826
110
3,985
(232)
(286)
610
(4,061)
(257)
372
189

(3)
818
117
3,885
(218)
(185)
272
(3,920)
(1,075)
248
56

(79)
864
121
3,882
(486)
(207)
400
(3,926)
(704)
73
63

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,202

3,434

3,693

Cash flows from investing activities
Proceeds from maturities of fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments

Purchases of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments
Net purchases of short-term securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities transactions in the course of settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,975

11,116

10,894

1,417
92
69
839

(11,609)
(51)
(48)
(580)
(199)
(21)
—
(344)

1,950
59
31
713

(12,090)
(49)
(123)
(534)
(326)
(113)
(13)
(304)

1,049
158
15
855

(11,325)
(52)
(48)
(554)
(498)
82
(12)
(358)

Net cash provided by (used in) investing activities

. . . . . . . . . . . . . . . . . . . . . . . .

(1,460)

317

206

Cash flows from financing activities
Treasury stock acquired—share repurchase  authorization . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock acquired—net employee share-based compensation . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock-employee share  options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from share-based  payment arrangements . . . . . . . . . . . . . . . . . . . . . .

(2,400)
(72)
(757)
(400)
491
332
—

(3,150)
(74)
(739)
(400)
392
183
55

(3,275)
(57)
(729)
—
—
195
57

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,806)

(3,733)

(3,809)

Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash  at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow information
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(9)

(73)
380

307

$

(12)

6
374

380

$

(10)

80
294

374

892
358

$ 1,207
365
$

$ 1,147
365
$

$

$
$

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

157

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY  OF SIGNIFICANT  ACCOUNTING POLICIES

Basis of Presentation

The consolidated  financial  statements include the accounts of The Travelers  Companies, Inc.
(together with  its  subsidiaries,  the  Company). The preparation  of the consolidated financial statements
in conformity  with U.S. generally  accepted accounting principles (GAAP) requires management to
make estimates and  assumptions  that  affect  the reported amounts of assets and liabilities and disclosure
of  contingent  assets and liabilities  at  the  date of the consolidated financial statements and the reported
amounts  of revenues and  claims  and  expenses during  the reporting period. Actual results could differ
from  those  estimates.  Certain  reclassifications have been made to the 2015  and 2014 financial
statements  to conform to  the  2016 presentation. All material intercompany transactions and balances
have  been  eliminated.

Adoption of Accounting Standards

Compensation—Stock Compensation:  Accounting for Share-Based Payments When the Terms of an Award

Provide  That  a  Performance  Target  Could  Be Achieved after the Requisite Service  Period

In June  2014,  the Financial  Accounting Standards Board (FASB) issued updated guidance to
resolve  diversity  in  practice concerning  employee share-based  payments that contain  performance
targets  that  could be  achieved after  the  requisite  service period. The updated guidance requires that  a
performance target that  affects  vesting  and that can be  achieved after the requisite service period be
treated as a performance  condition.  As  such, the performance target that affects vesting should not be
reflected in estimating  the  fair  value  of  the award  at the grant date. Compensation  cost should be
recognized  in the  period  in which it  becomes probable that the performance target will be achieved and
should represent  the  compensation cost  attributable  to the periods for which  service has been rendered.
If the performance  target  becomes  probable of being  achieved before the end of the  service period,  the
remaining unrecognized  compensation  cost for which requisite service has not yet been rendered is
recognized  prospectively  over  the  remaining service period. The total amount of compensation cost
recognized  during  and  after  the  service  period  should reflect the number  of awards that are expected  to
vest and  should  be  adjusted  to  reflect  those awards that ultimately vest. The updated guidance was
effective for  reporting  periods  beginning  after December 15,  2015. The adoption of  this guidance did
not have  a  material effect on  the  Company’s results of operations, financial  position or liquidity.

Presentation  of  Financial Statements:  Disclosure of Uncertainties about an Entity’s Ability to Continue  as a

Going Concern

In August 2014, the  FASB  issued  guidance to  address the diversity in practice in determining when

there  is  substantial  doubt about  an  entity’s ability to continue as a going concern and when an entity
must  disclose certain  relevant  conditions and events. The new guidance requires an entity to evaluate
whether  there are conditions  or  events,  considered in the aggregate, that raise  substantial doubt about
the  entity’s ability  to  continue  as  a  going concern within one year after the date that the financial
statements  are  issued  (or  available  to  be issued). The new guidance  allows the entity to consider the
mitigating  effects  of  management’s  plans that will alleviate the substantial doubt and requires certain
disclosures when  substantial doubt  is  alleviated as a result of consideration  of management’s plans. If
conditions  or  events  raise  substantial  doubt that is not alleviated, an entity should disclose that there is
substantial doubt about  the entity’s  ability to continue  as a going concern within one year after  the  date
that  the  financial  statements are  issued  (or available  to be issued), along with  the principal conditions

158

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

or events that raise substantial doubt,  management’s evaluation  of  the  significance  of  those conditions
or events in relation  to  the entity’s ability  to  meet its obligations  and management’s  plans that  are
intended to mitigate  those  conditions.  The updated guidance  was effective for annual periods ending
after December 15, 2016,  and  interim  and annual  periods thereafter.  The  adoption of this  guidance did
not have any effect on  the  Company’s  results of operations, financial  position or  liquidity.

Derivatives  and  Hedging:  Determining  Whether  the  Host Contract  in  a  Hybrid  Financial  Instrument  Issued

in  the  Form of  a Share  Is More  Akin to  Debt or to  Equity

In  November 2014,  the  FASB issued  updated  guidance  to clarify  when the  separation  of  certain
embedded derivative  features in  a  hybrid financial instrument that is issued in  the form  of a  share is
required. That  is,  an  entity  will  continue to evaluate whether the economic characteristics and risks  of
the  embedded  derivative  feature  are  clearly and closely related to those of the  host contract.
Specifically,  the updated guidance clarifies that an entity should  consider  all relevant terms  and
features, including  the embedded  derivative feature being evaluated  for  bifurcation, in  evaluating  the
nature  of the host  contract.

Furthermore, the  amendments clarify  that  no  single term or feature  would necessarily determine

the  economic characteristics and  risks  of the host  contract.  Rather,  the nature of the  host contract
depends  upon  the economic  characteristics  and risks  of  the entire  hybrid  financial instrument.  The
updated  guidance  was  effective  for  reporting  periods beginning  after December 15, 2015.  The  adoption
of  this  guidance did  not  have  a material  effect  on  the Company’s results of operations, financial
position or liquidity.

Consolidation: Amendments to  the  Consolidation Analysis

In  February 2015, the FASB  issued  updated guidance  that  makes  targeted  amendments to  the

current consolidation accounting  guidance. The update is  in response  to  accounting complexity
concerns, particularly  from the asset  management industry.  The  guidance  simplifies  consolidation
accounting  by reducing  the number  of  approaches to consolidation,  provides  a scope exception  to
registered money  market funds and  similar unregistered money market funds  and  ends  the indefinite
deferral  granted  to  investment companies from  applying  the  variable  interest  entity  guidance. The
updated  guidance  was  effective  for  reporting  periods beginning  after December 15, 2015.  The  adoption
of  this  guidance did  not  have  a material  effect  on  the Company’s results of operations, financial
position or liquidity.

Interest—Imputation  of  Interest: Simplifying  the Presentation  of Debt Issuance  Costs

In  April 2015,  the FASB  issued updated guidance to  clarify the required presentation  of debt
issuance  costs. The updated  guidance  requires  that  debt  issuance costs be presented  in the  balance
sheet as a direct  reduction from the  carrying amount  of  the recognized  debt  liability, consistent  with
the  treatment  of debt discounts. Amortization of debt issuance  costs  is  to  be  reported as interest
expense. The recognition  and  measurement  guidance  for debt issuance costs  are not  affected  by  the
updated  guidance.  The  updated guidance was effective for  reporting periods beginning  after
December 15, 2015.  The  updated guidance  is  consistent  with the  Company’s  accounting policy  and  its
adoption did not  have any  effect on the Company’s results  of  operations,  financial position  or liquidity.

159

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

Business  Combinations:  Simplifying  the  Accounting  for  Measurement-Period  Adjustments

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

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

In  March 2016,  the  FASB issued  updated guidance to simplify  several aspects  of  accounting  for

share-based payment  transactions  as  follows:

Accounting for  Income  Taxes

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

Forfeitures

The updated guidance  permits  an  entity to  make an  accounting  policy  election  to  either  account

for forfeitures  when they  occur or  continue to apply  the current  method  of  accruing  the compensation
cost  based on  the  number of awards  that are expected  to vest.

Minimum  Statutory  Tax Withholding  Requirements

The updated guidance  changes the threshold amount  an  entity can  withhold for taxes when  settling

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

160

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

Transition

The updated guidance  is effective  for  reporting  periods beginning  after December 15, 2016.  Early

adoption is  permitted  in any  interim  period; if early adoption  is  elected,  the entity  must  adopt all  of  the
amendments  in the  same  reporting  period and reflect any  adjustments  as  of the  beginning of  the fiscal
year.

The Company  adopted  the updated  guidance effective January 1,  2016.  With respect  to  the

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

Other  Accounting  Standards  Not Yet  Adopted

Revenue from  Contracts  with  Customers

In  May 2014, the  FASB  issued updated guidance to  clarify the  principles  for recognizing revenue.

While insurance  contracts  are  not  within the scope  of  this updated guidance,  the Company’s fee  income
related  to  providing  claims  and policy  management  services  as  well as claim  and  loss prevention
services will be subject  to  this updated  guidance.

The updated guidance  requires  an  entity to recognize revenue as  performance obligations are  met,

in order to reflect the  transfer  of promised goods or services  to  customers in  an amount that reflects
the  consideration  the entity is  entitled  to  receive for  those goods or services. The following steps are
applied  in  the updated guidance:  (1)  identify the  contract(s) with  a  customer; (2) identify  the
performance  obligations in  the contract;  (3) determine the  transaction  price; (4) allocate  the  transaction
price to the  performance  obligations  in  the contract;  and  (5)  recognize revenue when,  or as, the  entity
satisfies a performance  obligation.

The updated guidance  is effective  for  the quarter  ending  March 31, 2018.  The  adoption of this
guidance  is not  expected to have  a  material effect on the Company’s  results  of  operations,  financial
position or liquidity.

Financial  Instruments—Overall:  Recognition and  Measurement of  Financial  Assets  and  Financial Liabilities

In  January  2016,  the FASB  issued updated guidance to address the  recognition, measurement,
presentation,  and disclosure of  certain financial  instruments. The  updated  guidance requires  equity
investments,  except  those accounted for under the  equity  method  of  accounting, that have readily
determinable  fair  value  to  be measured  at fair value  with changes  in fair value recognized  in  net
income. Equity  investments that  do not have  readily determinable  fair  values may  be  remeasured at  fair
value either  upon the  occurrence of  an observable  price  change  or  upon identification  of an
impairment. A  qualitative  assessment for  impairment is required for  equity  investments  without  readily
determinable  fair  values.  The  updated guidance also eliminates the  requirement  to disclose the  method
and  significant assumptions used to estimate the fair value  of  financial  instruments  measured at
amortized cost on the  balance sheet. The updated  guidance  is  effective  for the  quarter ending
March  31, 2018  and will require recognition of a cumulative effect adjustment at  adoption.  Based  on
the  equity  investments  currently held  by  the Company, there  would  not  be a  material  effect on  the
Company’s results  of operations, financial  position or liquidity  if  the new guidance  were  able  to  be

161

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

adopted in the  current accounting period. The impact on  the Company’s  results  of operations,  financial
position or liquidity at  the  date of  adoption  of  the updated guidance will  be  determined  by  the equity
investments held by  the  Company and  the  economic conditions  at  that  time.

Leases

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

The updated guidance  is effective  for  reporting  periods beginning  after December 15, 2018,  and
will require that  the  earliest comparative period presented include  the measurement  and recognition  of
existing leases with an  adjustment  to  equity as  if  the updated  guidance  had always been applied.  Early
adoption is  permitted. The adoption  of  this guidance is not  expected  to  have  a material  effect  on  the
Company’s results  of  operations,  financial  position or liquidity.

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

Accounting

In  March 2016,  the  FASB issued  updated guidance that eliminates  the requirement to  retroactively

apply the equity  method  of  accounting  when  an  investment  that  was previously accounted  for  using
another method  of  accounting  becomes  qualified to  apply the  equity  method  due  to an  increase  in  the
level of ownership  interest  or  degree  of  influence. If the  investment  was  previously  accounted  for  as  an
available-for-sale  security,  any  related  unrealized gain or loss  in  accumulated  other comprehensive
income  at  the date  the investment  becomes  qualified for the  equity  method  is recognized through
earnings.  The  updated  guidance  is  effective for  reporting  periods beginning  after  December 15, 2016,
and  is to be applied  prospectively.  Early  adoption is permitted. The  adoption of  this guidance is  not
expected to have  a material  effect  on  the  Company’s results  of operations,  financial position  or
liquidity.

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

In  March 2016,  the  FASB issued  updated guidance clarifying  that  when a  call  (put) option  in a

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

162

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

guidance  is not  expected to have  a  material effect on the Company’s  results  of  operations,  financial
position or liquidity.

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

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

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

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

Intangibles—Goodwill  and  Other

In  January  2017,  the FASB  issued  updated guidance that eliminates the requirement to calculate
the  implied fair  value  of goodwill (i.e.,  Step  2 of the current  goodwill impairment  test) to  measure a
goodwill impairment charge.  Instead,  entities will  record an impairment  charge by  comparing a
reporting unit’s  fair  value  with its carrying  amount and  recognizing  an  impairment  charge  for  the excess
of  the carrying  amount over  estimated  fair value  (i.e., Step  1  of  current  guidance). The implied  fair
value of goodwill  is currently determined in Step 2 by  deducting the  fair value  of all  assets  and
liabilities  of the  reporting  unit (determined  in the  same manner as  a business combination)  from the
reporting unit’s  fair  value  as  determined  in Step 1 (including any corporate-level assets or liabilities that
were  included  in the determination of the  carrying amount  and fair  value of the  reporting unit  in
Step 1).  The updated guidance requires  an entity to  perform its annual,  or  interim,  impairment  test  by
either:  (1) an  initial qualitative assessment of 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 (consistent with current guidance),  or  (2)  applying Step 1.

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THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

The updated guidance  is effective  for  reporting  periods beginning  after December 15, 2019 and is

to be applied prospectively.  Early adoption is permitted for  interim or annual  goodwill  impairment  tests
performed on  testing  dates  after January 1, 2017. The adoption  of  this guidance  is not  expected  to  have
a  material effect on the  Company’s results of operations, financial position or liquidity.

Accounting  Policies

Investments

Fixed  Maturity  and Equity Securities

Fixed  maturities  include  bonds, notes and redeemable preferred stocks. Fixed maturities, including

instruments subject to securities lending  agreements, are classified  as  available  for sale  and  are
reported at fair  value, with  unrealized  investment  gains and  losses,  net  of  income  taxes, charged  or
credited directly to other comprehensive income.  Equity securities, which include public  common and
non-redeemable  preferred  stocks, are  classified as available  for sale  and are  reported  at  fair value with
unrealized gains and  losses,  net  of  income taxes, charged  or  credited directly to  other  comprehensive
income.

Real  Estate  Investments

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.

Short-term  Securities

Short-term  securities have an original  maturity of less  than one  year  and  are  carried  at amortized

cost, which approximates fair  value.

Other  Investments

Investments  in Private  Equity Limited  Partnerships, Hedge  Funds  and Real  Estate  Partnerships

The Company  uses  the equity  method  of accounting for investments  in  private  equity  limited
partnerships,  hedge funds and real  estate partnerships.  The  partnerships  and  the hedge funds generally
report  investments  on  their balance sheet at fair value. The financial statements prepared  by the
investee  are received  by  the Company  on a lag basis,  with the  lag  period generally  dependent upon the
type of underlying  investments. The private  equity  and real  estate partnerships provide  financial
information quarterly which is generally available  to investors,  including  the  Company, within three to
six  months following the  date of the reporting period.  The hedge  funds  provide  financial  information
monthly, which is generally  available to  investors  within one  month following  the  date of  the reporting
period.  The  Company regularly  requests  financial information from  the  partnerships  prior to  the receipt

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THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

of  the partnerships’ financial statements  and  records any material  information obtained  from these
requests  in its consolidated  financial  statements.

Other

Also included  in  other investments  are non-public  common  equities,  preferred  equities  and

derivatives. Non-public common equities  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.  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.

Net Investment Income

Investment  income  from fixed maturities  is  recognized based on  the constant  effective  yield
method which includes  an  adjustment  for  estimated principal pre-payments,  if any.  The  effective  yield
used  to determine  amortization  for  fixed maturities subject  to  prepayment risk  (e.g., asset-backed,
loan-backed  and  structured  securities)  is recalculated and  adjusted  periodically  based  upon  actual
historical and/or  projected future  cash  flows, which are obtained  from  a widely-accepted securities data
provider. The  adjustments to  the yield  for  highly rated  prepayable  fixed  maturities  are  accounted  for
using the  retrospective method. The  adjustments  to the yield  for non-highly  rated prepayable fixed
maturities are  accounted for  using  the  prospective method. Dividends  on equity  securities (including
those  with transfer  restrictions)  are recognized in  income when  declared.  Rental income on  real estate
is recognized on a straight-line  basis  over  the lease term.  See the section titled:  Real Estate  in note  3
for further discussion.  Investments in  private  equity  limited  partnerships,  hedge  funds, real  estate
partnerships and joint  ventures  are  accounted for using the  equity  method  of  accounting,  whereby  the
Company’s share of  the investee’s earnings  or  losses in  the fund is  reported in  net  investment  income.

Accrual  of income is suspended  on  non-securitized fixed maturities  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  fixed  maturities where the Company  records an  other-than-temporary impairment,  a

determination is  made as  to  the  cause  of the  impairment and whether  the Company  expects a  recovery
in the  value.  For  fixed  maturities  where  the Company expects a recovery in  value, not  necessarily  to
par,  the  constant  effective  yield method  is  utilized, and the investment is  amortized to  the expected
recovery  amount.

Investment Gains  and  Losses

Net  realized  investment  gains and losses are included as a component  of  pre-tax revenues  based

upon  specific identification  of the  investments  sold on the  trade date. Included  in net  realized
investment gains  (losses) are other-than-temporary impairment losses on invested  assets other  than
those  investments accounted  for using  the  equity  method of  accounting  as  described  in  the ‘‘Investment
Impairments’’  section that follows.

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THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

Investment  Impairments

The Company  conducts  a periodic  review  to  identify  and evaluate invested assets having

other-than-temporary impairments. Some of  the factors  considered  in identifying other-than-temporary
impairments  include:  (1)  for  fixed maturity investments,  whether the  Company intends to sell the
investment or whether  it is more  likely  than not  that the  Company  will be required to sell the
investment prior to  an anticipated  recovery  in value; (2) for  non-fixed maturity  investments,  the
Company’s ability  and intent to  retain  the  investment for a  reasonable  period of time sufficient  to allow
for an anticipated  recovery  in  value;  (3)  the likelihood of the recoverability of principal  and interest for
fixed  maturity  securities  (i.e.,  whether  there is a  credit loss) or cost for  equity  securities; (4) the  length
of  time  and extent  to  which  the  fair  value has  been  less than amortized  cost for  fixed  maturity
securities or cost  for  equity securities;  and (5) the  financial  condition, near-term  and long-term
prospects  for the  issuer, including the  relevant industry conditions and trends,  and  implications  of
rating  agency  actions and offering prices.

Other-Than-Temporary Impairments  of  Fixed Maturities and Equity  Securities

For  fixed  maturity investments that the  Company  does not intend to  sell  or  for which it  is more
likely  than  not that  the Company  would  not be required to sell  before an  anticipated  recovery in  value,
the  Company separates  the  credit  loss  component of the  impairment  from  the amount related  to all
other  factors and  reports  the credit loss  component  in net realized  investment  gains (losses).  The
impairment  related  to  all  other  factors  is  reported  in other comprehensive income.

For  equity  securities  (including public common  and non-redeemable  preferred  stock) and  for fixed

maturity investments the  Company  intends to sell  or  for which  it is more  likely than  not  that the
Company  will  be  required  to  sell  before  an anticipated recovery  in value,  the  full amount  of the
impairment  is included in  net  realized  investment gains (losses).

Upon  recognizing  an other-than-temporary impairment, the  new cost basis  of the  investment  is  the

previous  amortized cost  basis  less  the  other-than-temporary  impairment  recognized  in net  realized
investment gains  (losses). The new  cost  basis is not  adjusted  for any  subsequent  recoveries  in fair  value;
however, for  fixed  maturity investments  the  difference between  the  new  cost  basis and the  expected
cash flows is  accreted on a  quarterly  basis to net investment  income  over  the  remaining  expected life  of
the  investment.

Determination  of  Credit  Loss—Fixed Maturities

The Company  determines the credit loss  component of fixed maturity  investments  by  utilizing

discounted cash flow  modeling to determine  the present value  of  the security  and comparing the
present  value with  the  amortized cost  of the security. If the  amortized  cost is  greater than  the present
value of the  expected cash flows, the  difference is considered  a credit  loss  and  recognized in net
realized  investment  gains  (losses).

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

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THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

issuer valuation  assumption  utilizing  one  or  a combination  of  valuation methods as  deemed  appropriate
by  the Company.  The  Company  determines the undiscounted recovery value  by  allocating the  estimated
value of the  issuer to  the  Company’s  assessment  of  the priority of claims.  The  present  value  of  the  cash
flows is determined  by  applying  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)  and  an  estimated  recovery  time frame. Generally,  that time  frame for securities  for  which
the  issuer is  in  bankruptcy  is 12 months.  For securities  for which the  issuer  is financially  troubled but
not in bankruptcy, that  time frame  is  generally 24  months.  Included in  the  present  value  calculation are
expected principal  and  interest  payments; however, for securities for  which the  issuer  is  classified  as
bankrupt or in default, the present  value calculation assumes  no  interest  payments and a  single
recovery  amount.

In  estimating the recovery value, significant judgment is involved in  the development  of

assumptions relating to a  myriad of  factors related to the issuer including, but  not limited to,  revenue,
margin  and  earnings  projections,  the  likely market or liquidation  values  of  assets,  potential additional
debt  to  be incurred  pre- or  post-bankruptcy/restructuring,  the ability to  shift  existing  or new debt to
different priority  layers, the  amount  of  restructuring/bankruptcy expenses, the  size  and priority  of
unfunded pension  obligations, litigation  or  other contingent claims, the treatment of intercompany
claims  and the likely  outcome  with  respect to inter-creditor conflicts.

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, 2016 were  as  follows:

(at December 31, 2016)

Prime

Alt-A

Sub-Prime

Voluntary prepayment rates . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of  remaining  pool liquidated  due to  defaults . . . .
Loss severity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0% - 35% 4%  -  15%
3%  - 12%
0% - 46% 20% - 73% 22% -  52%
30% - 65% 42% - 90% 75% - 110%

Real Estate  Investments

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

167

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

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.

Other  Investments

Investments in Private Equity Limited  Partnerships, Hedge  Funds  and  Real  Estate  Partnerships

The Company  reviews  its  investments in private  equity  limited partnerships, hedge funds and  real

estate  partnerships  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.

Changes in Intent to  Sell  Temporarily  Impaired Assets

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 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.

Securities  Lending

The Company  has engaged  in  securities lending activities from  which it  generates net  investment
income  by lending  certain of  its  investments to  other institutions  for short  periods  of time. Borrowers
of  these securities  provide  collateral  equal to  at  least 102% of the  market  value  of  the loaned securities
plus  accrued  interest.  This  collateral  is  held by a third-party custodian,  and  the  Company has  the right
to access  the  collateral only  in  the event  that the  institution borrowing the  Company’s  securities  is  in
default  under the  lending agreement.  Therefore,  the Company does  not  recognize the  receipt  of the
collateral  held  by the  third-party  custodian  or  the obligation to  return  the collateral. The  loaned
securities remain a  recorded  asset of  the  Company. The  Company  accepts only  cash as collateral  for
securities on loan and  restricts the  manner in which that cash  is  invested.

Reinsurance Recoverables

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,
applicable coverage  defenses  and other  relevant  factors.  Amounts deemed to be  uncollectible,  including
amounts due from  known insolvent  reinsurers, are written  off  against  the allowance for  estimated
uncollectible reinsurance recoverables. Any  subsequent collections  of  amounts  previously  written off are
reported as part  of claims and claim  adjustment  expenses.  The Company  evaluates  and  monitors  the

168

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

financial condition  of its  reinsurers under  voluntary reinsurance arrangements  to  minimize its  exposure
to significant  losses from  reinsurer  insolvencies.

Deferred  Acquisition  Costs

Incremental  direct  costs  of  acquired, new and renewal insurance contracts, consisting  of
commissions  (other  than contingent 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.

Contractholder  Receivables and  Payables

Under  certain workers’ compensation insurance contracts  with deductible features,  the Company  is

obligated to  pay  the claimant for  the  full  amount of the  claim.  The  Company is  subsequently
reimbursed by the  policyholder  for  the  deductible amount. These  amounts are  included on  a gross  basis
in the  consolidated balance sheet  in  contractholder  payables  and  contractholder receivables,
respectively.

Goodwill  and  Other Intangible  Assets

The Company  performs a  review,  on at least an annual basis, of goodwill held by the reporting
units which are  the Company’s three  operating and reportable segments:  Business  and  International
Insurance; Bond  &  Specialty  Insurance;  and  Personal Insurance.  The Company  estimates  the  fair  value
of  its reporting  units and compares  it  to  their carrying value,  including  goodwill.  If the  carrying  values
of  the reporting  units were  to exceed  their fair  value, the amount  of  the  impairment would be
calculated and goodwill  adjusted  accordingly.

The Company  uses  a discounted cash flow model  to estimate the  fair  value  of  its reporting  units.
The discounted cash  flow  model  is  an  income approach  to valuation that  is based on  a detailed  cash
flow  analysis  for deriving a  current  fair  value of reporting  units  and  is  representative  of the  Company’s
reporting units’  current  and  expected  future  financial performance.  The  discount  rate  assumptions
reflect  the Company’s  assessment of  the  risks  inherent in  the projected  future  cash flows and  the
Company’s weighted-average cost  of capital, and  are  compared against available  market data for
reasonableness.

Other  indefinite-lived  intangible assets held by the  Company  are  also reviewed  for  impairment on

at least  an annual  basis.  The  classification  of  the asset as  indefinite-lived is  reassessed and an
impairment  is recognized if  the carrying  amount of the asset  exceeds its fair value.

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
impairment  in  value.  Impairment is recognized only if  the carrying  amount  of  the intangible  asset  is not
recoverable  from  its  undiscounted cash  flows and  is  measured  as the  difference  between the  carrying
amount and the fair value of the asset.

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THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

As a result  of  the  reviews  performed  for the  years ended December 31, 2016,  2015  and 2014,  the
Company  determined  that  the  estimated fair value substantially exceeded the  respective carrying value
of  its reporting  units for  those years  and that  goodwill was not  impaired.  The  Company also
determined  during  its reviews for each  year that  its other  indefinite-lived intangible assets and finite-
lived  intangible  assets  were not  impaired.

Claims  and  Claim  Adjustment  Expense  Reserves

Claims  and  claim adjustment  expense  reserves represent estimates for  the ultimate cost  of  unpaid

reported and  unreported claims incurred and related expenses.  The  reserves  are  adjusted regularly
based  upon experience. Included  in  the  claims and claim adjustment expense  reserves  in the
consolidated  balance sheet  are reserves  for long-term  disability  and annuity claim payments,  primarily
arising  from workers’  compensation  insurance and workers’ compensation  excess insurance  policies, that
are discounted  to  the  present value of  estimated future payments.

The Company  performs a  continuing review of its claims  and claim adjustment expense reserves,

including its  reserving  techniques and  the  impact of reinsurance. The reserves are also  reviewed
regularly by qualified  actuaries employed by the Company.  Since the  reserves  are  based  on  estimates,
the  ultimate  liability may be  more  or  less than such reserves.  The effects of  changes in  such  estimated
reserves  are included in  the results of  operations in the  period in which  the  estimates  are changed.
Such  changes in  estimates could  occur  in a future period  and may be  material  to  the Company’s results
of  operations  and  financial position  in  such period.

Other  Liabilities

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,
2016 and  2015,  the Company  had  a liability of $242 million  and $241 million,  respectively, for guaranty
fund  and  other  insurance-related  assessments and related  recoverables  of  $16 million  and  $18  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 1%, 2%  and  1% of total  net  written  premiums  for the  years ended
December 31, 2016,  2015  and 2014, respectively. Policyholder dividends  are accrued  against  earnings
using best available  estimates of amounts to  be paid. The  liability accrued  for  policyholder  dividends
totaled  $62 million  and  $57 million  at December 31, 2016 and  2015, respectively.

170

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

Treasury Stock

The cost of common stock  repurchased by the Company is reported  as  treasury stock  and

represents authorized  and  unissued  shares of the Company  under  the  Minnesota  Business  Corporation
Act.

Statutory  Accounting  Practices

The Company’s  U.S.  insurance  subsidiaries, domiciled principally in the State  of  Connecticut, are

required  to 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.  The  State  of  Connecticut requires  insurers  domiciled in  Connecticut to  prepare  their
statutory  financial  statements in  accordance with National  Association of Insurance  Commissioners’
(NAIC)  statutory  accounting  practices.

Permitted  statutory  accounting  practices are those  practices  that differ either  from state-prescribed

statutory  accounting  practices or  NAIC  statutory accounting practices.

The Company  does  not apply any  statutory accounting practices that would be considered a

prescribed or  permitted  statutory  accounting practice that  differs from NAIC  statutory  accounting
practices.

The Company’s  non-U.S.  insurance subsidiaries file financial  statements prepared in  accordance

with the  regulatory  reporting  requirements  of their  respective local jurisdiction.

Premiums  and  Unearned  Premium Reserves

Premiums are recognized as revenues  pro rata over the policy period.  Unearned  premium reserves

represent the unexpired portion  of policy premiums. Accrued  retrospective  premiums are  included in
premium balances receivable.  Premium  balances  receivable are reported  net  of  an allowance  for
estimated  uncollectible  premium  amounts.

Ceded  premiums are  charged to  income over the applicable  term of the  various reinsurance
contracts with third  party  reinsurers.  Prepaid reinsurance  premiums represent  the  unexpired  portion  of
premiums ceded to  reinsurers  and are  reported  as part  of  other  assets.

Fee  Income

Fee income  includes servicing fees  from carriers and revenues  from  large  deductible policies and

service  contracts  and is recognized  pro  rata over  the contract  or  policy  periods.

Other  Revenues

Other  revenues include  revenues from premium  installment  charges, which are  recognized  as

collected,  revenues  of  noninsurance  subsidiaries other than fee  income  and gains  and  losses  on
dispositions  of  assets  and  redemption  of  debt,  and  other  miscellaneous  revenues  including  a  gain
recognized as  a result of the  settlement of  a  reinsurance  dispute.

171

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

Income  Taxes

The Company  recognizes  deferred  income tax assets and liabilities  for the  expected future tax

effects attributable  to temporary  differences between the  financial  statement  and  tax  return bases of
assets  and liabilities, based  on  enacted  tax  rates  and  other provisions  of  the  tax law.  The  effect of  a
change in tax  laws  or rates  on deferred  tax assets  and liabilities is recognized in  income  in  the period in
which such  change  is  enacted.  Deferred  tax assets  are  reduced  by a  valuation  allowance  if it  is more
likely  than  not that  all  or some portion  of the deferred tax  assets will  not  be  realized.

Foreign  Currency  Translation

The Company  assigns  functional  currencies to its foreign  operations, which are  generally the

currencies of the local operating environment.  Foreign currency  amounts  are remeasured to the
functional currency,  and the  resulting  foreign  exchange gains  or  losses are  reflected  in earnings.
Functional  currency amounts are then  translated into U.S. dollars.  The  foreign currency  remeasurement
and  translation  are calculated using  current exchange  rates for  items reported  in the  balance  sheets  and
average  exchange rates  for items  recorded in earnings.  The change in  unrealized foreign currency
translation gain or  loss  during  the  year,  net of tax,  is  a component  of  other  comprehensive income.

Share-Based  Compensation

The Company  has an  employee  stock incentive compensation  plan  that  permits  grants of

nonqualified  stock options,  incentive  stock  options,  stock appreciation  rights, restricted stock,  deferred
stock, stock units,  performance awards  and other share-based or share-denominated awards with
respect  to the Company’s  common  stock.

Compensation  cost  is  measured based on  the grant-date fair  value of  an  award, utilizing  the
assumptions discussed  in  note 13. Compensation  cost  is  recognized for  financial  reporting purposes
over  the period in  which  the employee  is required to provide service  in  exchange  for the  award
(generally the  vesting period).  In connection with certain share-based  awards, participants  are  entitled
to receive  dividends  during  the  vesting  period,  either in cash or  dividend equivalent shares,
commensurate  with the  dividends  paid  to  common  shareholders.  Dividends  and  dividend equivalent
shares on  awards  that are expected  to  vest are recorded  in retained  earnings.  Dividends paid on  awards
that  are not expected to  vest  as  part  of  the  Company’s forfeiture  estimate are  recorded  as
compensation  expense.

Nature of Operations

The Company  is  organized  into three reportable business segments:  Business  and  International
Insurance; Bond  &  Specialty  Insurance;  and  Personal Insurance.  These  segments reflect  the  manner  in
which the Company’s businesses are currently managed  and represent the  aggregation  of  products  and
services based on the  type  of customer,  how  the business is marketed  and  the  manner  in which risks
are underwritten. The specific business segments  are  as follows:

Business  and  International  Insurance

Business  and  International  Insurance offers a broad array  of  property  and  casualty insurance  and
insurance related  services to its clients,  primarily in  the United  States  and  in  Canada,  as well as  in  the

172

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

United Kingdom, the  Republic  of Ireland,  Brazil and throughout  other  parts  of  the world as  a
corporate member of Lloyd’s. Business  and International  Insurance  is  organized  as follows:

Domestic

• Select  Accounts  provides small  businesses with property and  casualty products, including

commercial  multi-peril,  commercial property, general liability, commercial  auto  and workers’
compensation  insurance.

• Middle  Market provides  mid-sized  businesses with property and  casualty products, including

commercial  multi-peril, commercial property, general liability, commercial  auto  and workers’
compensation  insurance, as well  as risk  management, claims  handling and other services. Middle
Market generally provides these products to mid-sized businesses through Commercial Accounts,
as well  as  to  targeted industries  through Construction, Technology, Public Sector Services and
Oil &  Gas.  Middle  Market  also provides mono-line umbrella  and excess  coverage insurance
through  Excess  Casualty.

• National  Accounts  provides large  companies with casualty products and  services, including

workers’ compensation, general  liability  and automobile  liability, generally utilizing loss-sensitive
products, on both a  bundled  and unbundled basis. National  Accounts also includes the
Company’s  commercial  residual market business, which primarily offers workers’  compensation
products  and  services  to the  involuntary market.

• First  Party provides  traditional  and customized property insurance programs  to large  and

mid-sized  customers  through  National Property, insurance for goods in transit and movable
objects,  as  well as builders’  risk  insurance,  through Inland Marine, insurance for the marine
transportation  industry  and  related services, as well  as other  businesses involved in  international
trade,  through  Ocean  Marine,  and comprehensive breakdown coverages  for equipment,  including
property  and  business  interruption coverages,  through Boiler & Machinery.

• Specialized  Distribution provides  insurance coverage for the commercial transportation industry,
as well  as  commercial  liability and commercial property  policies for  small,  difficult to  place
specialty  classes  of  commercial business primarily  on an excess and  surplus lines basis, through
Northland,  and tailored property  and casualty programs  on  an  admitted basis for customers  with
common  risk  characteristics  or  coverage requirements through National Programs. Specialized
Distribution  also serves  small  to  medium-sized  agricultural businesses, including farms, ranches,
wineries and  related operations, through Agribusiness.

International

• International, through its  operations in Canada, the  United Kingdom and  the  Republic of

Ireland,  offers  property  and  casualty  insurance and  risk management services to  several customer
groups, including,  among  others, those  in the  technology, public  services, and financial  and
professional  services industry sectors.  In addition, International markets personal lines and  small
commercial insurance business in Canada. International  also provides  insurance coverages for
foreign  organizations  with exposures  in the United States through Global Partner Services.
International, through  its  Lloyd’s syndicate (Syndicate 5000), for which the Company  provides

173

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

100%  of the  capital, underwrites five principal businesses—marine,  global property, accident  &
special  risks,  power & utilities  and aviation.

International  also  includes  results from  J.  Malucelli Participa¸c˜oes em Seguros e Resseguros S.A.
(JMalucelli)  and J.  Malucelli  Latam S.A.  in Brazil.  The Company owns 49.5% of both
JMalucelli, a  market  leader  in surety coverages in Brazil, and  J. Malucelli Latam S.A., which  in
September  2015  acquired a  majority interest in  JMalucelli Travelers Seguros S.A., a Colombian
start-up  surety  provider.  These joint venture investments are accounted for using the  equity
method  and  are  included in  ‘‘other  investments’’ on the consolidated balance sheet. Also, as  a
result of  a transaction  that  was  completed in October 2015  with Paran´a Banco S.A., the
Company’s joint  venture  partner  in Brazil, the Company acquired 100% of the common stock  of
Travelers  Participa¸c˜oes  em  Seguros Brasil S.A., which comprises JMalucelli’s former  property
and  casualty insurance  business  other than surety. The  Company consolidates this investment  in
its  financial  statements  and includes Paran´a Banco S.A.’s preferred stock interest in  ‘‘other
liabilities.’’

Business and  International 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  are  collectively  referred to  as Business and International Insurance Other.

Bond  &  Specialty Insurance

Bond &  Specialty  Insurance provides surety,  fidelity,  management liability, professional liability,
and  other  property  and casualty coverages  and related  risk management services to  a wide range of
primarily  domestic  customers, utilizing  various degrees of financially-based underwriting approaches.
The range of  coverages  includes performance, payment and commercial surety and fidelity bonds for
construction and general commercial  enterprises; management liability coverages including directors
and  officers liability,  employee  dishonesty, employment  practices liability, fiduciary liability and cyber
risk  for public  corporations,  private  companies and  not-for-profit organizations; professional liability
coverage for  a variety of  professionals  including, among others,  lawyers and design professionals;  and
management  liability,  professional  liability, property, workers’ compensation, auto and general liability
for financial  institutions.

Personal  Insurance

Personal  Insurance  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.

Automobile policies  provide  coverage for  liability to others for both bodily injury and  property

damage, uninsured motorist protection,  and  for physical  damage  to an insured’s own  vehicle from
collision, fire, flood,  hail and  theft.  In addition, many states require policies to  provide first-party
personal injury protection, frequently referred to as no-fault coverage.

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 also writes

174

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

1.  SUMMARY  OF  SIGNIFICANT  ACCOUNTING POLICIES (Continued)

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.

2.  SEGMENT  INFORMATION

The accounting  policies  used  to  prepare  the segment  reporting  data  for the  Company’s  three
reportable business  segments are  the  same as  those described in  the Summary of Significant  Accounting
Policies in note  1.

Except  as described  below  for certain legal entities, the Company allocates  its invested assets and

the  related  net  investment  income to  its  reportable business  segments.  Pre-tax  net  investment  income  is
allocated based  upon an  investable  funds  concept, which takes into account liabilities  (net  of
non-invested assets) and appropriate  capital  considerations  for each  segment.  For  investable  funds,  a
benchmark investment  yield is  developed that  reflects the  estimated  duration  of  the loss  reserves’ future
cash flows,  the interest  rate environment  at  the time the losses were  incurred  and  A+  rated corporate
debt  instrument yields.  For  capital,  a  benchmark  investment  yield is developed that  reflects the  average
yield on the  total investment  portfolio.  The benchmark  investment  yields are  applied to  each  segment’s
investable funds and capital, respectively,  to produce  a  total  notional investment  income  by segment.
The Company’s  actual  net investment  income  is  allocated to each  segment in proportion to  the
respective segment’s notional  investment  income to total notional  investment  income. There are  certain
legal entities  within  the  Company  that  are dedicated to  specific reportable business  segments.  The
invested  assets and related  net investment income  from  these  legal entities  are  reported  in the
applicable business  segment and  are  not  allocated  among  the  other  business segments.

The cost of the  Company’s  catastrophe  treaty program is  included  in the  Company’s  ceded

premiums and  is  allocated among reportable business segments based  on an  estimate  of  actual  market
reinsurance pricing using  expected  losses  calculated  by the  Company’s catastrophe  model,  adjusted  for
any experience  adjustments.

175

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

2.  SEGMENT  INFORMATION  (Continued)

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

income, net  written premiums  and  total  assets by  reportable  business  segments.

(for the year ended December 31, in  millions)

Business  and
International
Insurance

Bond &
Specialty
Insurance

Personal
Insurance

Total
Reportable
Segments

2016
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,620
1,763
442
176

Total  operating  revenues(1) . . . . . . . . . . . . . . . . . . . . .

$17,001

Amortization  and  depreciation . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating  income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,956
659
2,048

2015
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,521
1,824
445
23

Total  operating revenues(1) . . . . . . . . . . . . . . . . . . . . .

$16,813

Amortization  and  depreciation . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating  income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,907
769
2,170

2014
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$14,512
2,156
438
46

Total  operating revenues(1) . . . . . . . . . . . . . . . . . . . . .

$17,152

Amortization  and  depreciation . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating  income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,909
798
2,347

$2,088
210
—
20

$2,318

$ 457
307
653

$2,085
223
—
22

$2,330

$ 467
272
633

$2,076
252
—
19

$2,347

$ 482
348
727

$7,826
329
16
56

$8,227

$1,391
191
510

$7,268
332
15
48

$7,663

$1,322
402
889

$7,125
379
12
80

$7,596

$1,347
366
824

$24,534
2,302
458
252

$27,546

$ 4,804
1,157
3,211

$23,874
2,379
460
93

$26,806

$ 4,696
1,443
3,692

$23,713
2,787
450
145

$27,095

$ 4,738
1,512
3,898

(1) Operating  revenues for reportable  business segments exclude net realized investment gains.

Operating  income  for  reportable business segments  equals net income excluding the after-tax
impact of net  realized investment gains.

176

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

2.  SEGMENT  INFORMATION  (Continued)

Net  written  premiums by  market were  as follows:

(for the year ended December 31, in  millions)

Business and  International Insurance:

Domestic:

2016

2015

2014

Select Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Middle  Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National  Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Specialized  Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International

Total  Business  and International Insurance . . . . . . . . . . . . . . . . .

Bond &  Specialty  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,729
6,463
1,058
1,601
1,094

12,945
1,730

14,675

2,099

$ 2,716
6,302
1,048
1,564
1,111

12,741
1,842

14,583

2,081

$ 2,707
6,077
1,047
1,579
1,074

12,484
2,152

14,636

2,103

Personal Insurance:

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners  and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Personal  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,327
3,857

8,184

3,700
3,757

7,457

3,390
3,775

7,165

Total  consolidated  net written premiums . . . . . . . . . . . . . . . . . . . . .

$24,958

$24,121

$23,904

177

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

2.  SEGMENT  INFORMATION  (Continued)

Business  Segment  Reconciliations

(for the year ended December 31, in  millions)

2016

2015

2014

Revenue reconciliation
Earned premiums

Business and  International  Insurance:

Domestic:

Workers’ compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General  liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  multi-peril
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International

Total Business and International Insurance . . . . . . . . . . . . . . . . . . .

$ 3,969
2,010
1,769
1,977
3,148
31

12,904
1,716

14,620

$ 3,867
1,922
1,766
1,898
3,133
39

12,625
1,896

14,521

$ 3,711
1,900
1,747
1,834
3,071
42

12,305
2,207

14,512

Bond & Specialty  Insurance:

Fidelity and surety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

962
946
180

954
955
176

936
963
177

Total Bond & Specialty Insurance . . . . . . . . . . . . . . . . . . . . . . . . .

2,088

2,085

2,076

Personal Insurance:

Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Homeowners and Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total operating revenues for reportable segments . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,013
3,813

7,826

24,534
2,302
458
252

27,546
11
68

3,512
3,756

7,268

23,874
2,379
460
93

26,806
6
3

3,316
3,809

7,125

23,713
2,787
450
145

27,095
—
79

Total consolidated revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$27,625

$26,815

$27,174

Income reconciliation, net  of  tax
Total operating income for  reportable segments . . . . . . . . . . . . . . . . . . . . . .
Interest Expense and Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,211
(244)

$ 3,692
(255)

$ 3,898
(257)

Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,967
47

3,437
2

3,641
51

Total consolidated net  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,014

$ 3,439

$ 3,692

(1) The primary component  of Interest  Expense  and  Other  was  after-tax interest  expense  of $236 million,

$242 million and $240 million  in  2016, 2015 and  2014,  respectively.

178

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

2.  SEGMENT  INFORMATION  (Continued)

(at December 31, in millions)

Asset  reconciliation:

2016

2015

Business  and  International  Insurance . . . . . . . . . . . . . . . . .
Bond  &  Specialty  Insurance . . . . . . . . . . . . . . . . . . . . . . . .
Personal  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 79,468
7,296
13,118

$ 79,692
7,360
12,748

Total  assets  for  reportable segments . . . . . . . . . . . . . . . . .
Other  assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99,882
363

99,800
384

Total  consolidated  assets . . . . . . . . . . . . . . . . . . . . . . .

$100,245

$100,184

(1) The  primary  components  of other  assets at December 31, 2016 and 2015 were other

intangible  assets and  deferred  taxes.

Enterprise-Wide Disclosures

The Company does not have  revenue from transactions with a single customer amounting to

10 percent or more of  its  revenues.

The following table  presents revenues of  the Company’s operations based on  location:

(for the year ended December 31, in  millions)

2016

2015

2014

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S.
Non-U.S.:

$25,904

$25,127

$25,103

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . .

1,154
567

1,721

1,202
486

1,688

1,474
597

2,071

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . .

$27,625

$26,815

$27,174

179

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS

Fixed  Maturities

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

were  as  follows:

(at December 31, 2016, in millions)

Amortized
Cost

Gross Unrealized
Losses
Gains

Fair
Value

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

government  agencies  and authorities . . . . . . . . . . . . . . . . . . . .

$ 2,031

$

9

$

5

$ 2,035

Obligations  of  states,  municipalities  and  political subdivisions:

Local  general  obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State general  obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  obligations of states, municipalities  and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt  securities  issued  by foreign  governments . . . . . . . . . . . . . . .
Mortgage-backed  securities,  collateralized  mortgage  obligations

and  pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,955
10,910
1,717
4,968

31,550
1,631

1,614
22,737
87

271
215
36
190

712
34

100
508
6

182
147
22
1

352
3

6
138
—

14,044
10,978
1,731
5,157

31,910
1,662

1,708
23,107
93

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$59,650

$1,369

$504

$60,515

(at December 31, 2015, in millions)

Amortized
Cost

Gross Unrealized
Losses
Gains

Fair
Value

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

government  agencies  and authorities . . . . . . . . . . . . . . . . . . . .

$ 2,202

$

8

$ 16

$ 2,194

Obligations  of  states,  municipalities  and  political subdivisions:

Local  general  obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State general  obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-refunded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  obligations of states, municipalities  and political

subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt  securities  issued by foreign governments . . . . . . . . . . . . . . .
Mortgage-backed  securities,  collateralized  mortgage  obligations

and  pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,744
9,492
1,978
5,813

30,027
1,829

1,863
22,854
103

577
472
97
247

1,393
45

124
523
7

3
4
2
—

9
1

6
288
—

13,318
9,960
2,073
6,060

31,411
1,873

1,981
23,089
110

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$58,878

$2,100

$320

$60,658

The amortized cost and fair value of fixed maturities by  contractual maturity follow. Actual
maturities will  differ  from contractual  maturities  because borrowers may have the right to call  or
prepay obligations  with or  without call or prepayment penalties.

180

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

(at December 31, 2016, in millions)

Amortized
Cost

Fair
Value

Due  in  one year or  less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due  after  1 year through  5  years . . . . . . . . . . . . . . . . . . . . . . .
Due  after  5 years  through  10  years . . . . . . . . . . . . . . . . . . . . . .
Due  after  10  years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,619
16,417
14,258
21,742

$ 5,677
16,926
14,449
21,755

Mortgage-backed  securities,  collateralized  mortgage  obligations

and pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . . .

1,614

1,708

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$59,650

$60,515

58,036

58,807

Pre-refunded  bonds  of  $5.16  billion and $6.06 billion  at  December  31, 2016 and 2015, respectively,

were  bonds  for  which  states  or municipalities have established irrevocable trusts, almost exclusively
comprised  of  U.S.  Treasury  securities,  which  were created to satisfy their responsibility for payments of
principal and  interest.

The Company’s  fixed maturity investment  portfolio at December 31, 2016 and 2015 included

$1.71  billion  and  $1.98 billion, respectively,  of  residential  mortgage-backed securities,  which include
pass-through  securities and  collateralized mortgage  obligations (CMOs). Included in the totals at
December 31, 2016  and 2015  were  $563  million and $676 million, respectively,  of GNMA, FNMA,
FHLMC (excluding  FHA  project loans)  and Canadian government guaranteed residential mortgage-
backed pass-through  securities  classified  as available for sale. Also included in  those totals were
residential CMOs  classified as  available  for sale with a  fair value of $1.15 billion  and $1.30 billion  at
December 31, 2016  and 2015, respectively. Approximately 51% and 48% of  the Company’s CMO
holdings  at  December  31,  2016 and  2015,  respectively, were guaranteed by or fully  collateralized by
securities issued  by GNMA,  FNMA  or  FHLMC. The  average credit rating of the $566 million and
$683 million  of non-guaranteed CMO  holdings  at  December 31, 2016 and 2015, respectively,  was
‘‘Baa2’’  at  both  dates.  The  average  credit rating of all  of the above securities was ‘‘Aa2’’ and ‘‘Aa3’’ at
December 31, 2016  and 2015, respectively.

At December 31, 2016  and 2015, the  Company held commercial  mortgage-backed securities

(CMBS,  including  FHA project  loans)  of $938 million and $865  million, respectively, which are
included  in  ‘‘All other  corporate bonds’’  in the tables above. At December 31, 2016 and  2015,
approximately $290  million and $303 million  of  these  securities, respectively, or the loans backing such
securities,  contained guarantees by the  U.S.  government  or  a government-sponsored enterprise. The
average  credit rating  of the  $648  million  and $562 million of non-guaranteed securities at December  31,
2016 and  2015, respectively, was ‘‘Aaa’’ at  both  dates. The  CMBS portfolio is supported by loans that
are diversified  across economic sectors  and  geographical  areas. The average credit rating of the CMBS
portfolio was ‘‘Aaa’’ at  both December 31, 2016 and  2015.

181

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

At December  31,  2016 and  2015, the Company  had $286 million  and $269  million,  respectively, of

securities on loan as part of a  tri-party  lending agreement.

Proceeds from  sales  of fixed  maturities classified as  available for  sale  were $1.42 billion,

$1.95  billion  and $1.05  billion  in  2016,  2015 and  2014, respectively.  Gross  gains  of $79  million,
$95 million and $44  million  and gross  losses of $20 million,  $14 million  and  $12 million  were  realized
on  those sales in 2016,  2015 and  2014,  respectively.

At December  31,  2016 and  2015, the Company’s insurance  subsidiaries  had  $4.56 billion  and
$4.68  billion,  respectively, of  securities  on deposit at financial  institutions  in  certain  states pursuant to
the  respective states’  insurance  regulatory requirements.  Funds deposited  with  third parties to be  used
as collateral  to  secure  various  liabilities  on  behalf  of  insureds,  cedants  and  other  creditors  had a  fair
value of $35 million and $28 million  at December 31, 2016 and  2015, respectively. Other  investments
pledged as collateral  securing  outstanding letters  of  credit  had  a fair  value  of $3 million  and  $21  million
at December 31, 2016  and 2015, respectively. In addition,  the  Company  utilized  a Lloyd’s  trust deposit
at December 31, 2016  and 2015, whereby  owned securities  with  a  fair value  of  approximately
$97 million and $140  million,  respectively, held by  an  insurance subsidiary  were pledged into  a Lloyd’s
trust account to  support  capital requirements  for the Company’s operations  at Lloyd’s.

Equity  Securities

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

Gross
Unrealized

(at December 31, 2016, in millions)

Cost

Gains

Losses

Fair  Value

Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$390
114

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$504

$216
20

$236

$3
5

$8

$603
129

$732

(at December 31, 2015, in millions)

Gross
Unrealized

Cost

Gains

Losses

Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$386
142

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$528

$164
26

$190

$ 7
6

$13

Fair
Value

$543
162

$705

Proceeds  from sales of  equity  securities classified as available for sale were $92 million, $59 million

and  $158  million  in  2016,  2015  and 2014,  respectively.  Gross gains  of $17 million, $16 million and
$27 million and  gross  losses of $3  million, $10  million and $3 million were realized  on those sales in
2016,  2015 and 2014, respectively.

Real  Estate

The Company’s real  estate investments  include warehouses, office buildings and other commercial
land  and properties  that are directly  owned. The Company negotiates commercial leases with individual

182

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

tenants through unrelated, licensed  real  estate  brokers.  Negotiated  terms  and  conditions include,  among
others, rental  rates,  length  of lease period  and  improvements  to  the premises  to  be  provided  by the
landlord.

Proceeds from  the sale  of real estate  investments  were $69  million, $31  million and $15  million in
2016,  2015 and  2014,  respectively.  Gross gains of $7 million, $4  million  and  $6  million were  realized  on
those  sales in 2016,  2015 and  2014, respectively, and there were  no  gross  losses.  Accumulated
depreciation  on real  estate held for  investment  purposes was  $332  million  and $320 million at
December 31, 2016 and  2015, respectively.

Future  minimum  rental income  on  operating leases  relating to the  Company’s  real estate

properties is expected  to  be  $84 million,  $74 million, $62 million,  $46 million  and $34  million  for  2017,
2018,  2019, 2020 and 2021, respectively,  and $45  million  for 2022 and  thereafter.

Short-term  Securities

The Company’s  short-term securities consist of Aaa-rated  registered money  market  funds,  U.S.

Treasury securities, high-quality  commercial paper (primarily A1/P1)  and  high-quality  corporate
securities purchased within a year to  their maturity with a  combined  average of  80 days  to maturity  at
December 31, 2016.  The  amortized cost  of these securities, which  totaled $4.87  billion and  $4.67 billion
at December 31, 2016  and 2015, respectively, approximated their fair  value.

Variable  Interest  Entities

Entities  which  do not  have  sufficient  equity  at risk to allow  the entity  to  finance  its  activities
without additional financial  support  or  in  which the  equity  investors,  as a  group,  do not  have  the
characteristic of  a  controlling financial  interest  are  referred  to as  variable interest entities  (VIE).  A
VIE  is  consolidated by the  variable  interest holder that is determined  to have  the controlling financial
interest  (primary  beneficiary) as  a  result  of  having both  the power to direct  the activities  of a  VIE that
most significantly  impact  the VIE’s economic performance  and the  obligation to  absorb  losses  or  right
to receive  benefits  from the VIE that  could potentially be  significant  to  the VIE. The Company
determines  whether it is the  primary beneficiary of an entity subject  to  consolidation  based  on a
qualitative  assessment  of the  VIE’s  capital structure, contractual  terms, nature  of the  VIE’s  operations
and  purpose and  the  Company’s relative exposure to the related  risks of the  VIE on  the  date it
becomes  initially involved in  the  VIE.  The  Company reassesses  its  VIE determination  with respect  to
an  entity on an  ongoing  basis.

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.
These  equity interests generally cannot  be redeemed. Distributions from  these investments  are received
by  the Company as a  result of  liquidation  of  the underlying  investments of the  funds  and/or as income
distribution. The Company’s  maximum exposure  to loss with  respect to these  investments is  limited  to
the  investment  carrying amounts reported in  the Company’s  consolidated  balance  sheet and any
unfunded commitment. Neither  the carrying amounts nor the unfunded  commitments related to these
VIEs  are material.

183

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

Unrealized  Investment  Losses

The following  tables  summarize, for all investments  in an unrealized loss position at  December 31,

2016 and  2015,  the aggregate  fair  value  and  gross unrealized loss by  length of  time  those securities
have  been continuously  in an  unrealized  loss position. The  fair value  amounts reported in  the tables  are
estimates  that are prepared  using  the  process  described  in note  4.  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.

(at December 31, 2016, in millions)

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

Obligations  of  states,  municipalities  and

Less than 12 months

12 months  or  longer

Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

$ 1,124

$

5

$ —

$—

$ 1,124

$ 5

political  subdivisions . . . . . . . . . . . . . .

9,781

352

Debt  securities issued  by  foreign

governments . . . . . . . . . . . . . . . . . . .

360

3

Mortgage-backed  securities,

collateralized  mortgage  obligations  and
pass-through  securities . . . . . . . . . . . .
All  other  corporate bonds . . . . . . . . . . .
Redeemable  preferred  stock . . . . . . . . . .

528
6,470
—

Total  fixed maturities . . . . . . . . . . . . .

18,263

Equity  securities
Public common  stock . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . .

Total  equity  securities . . . . . . . . . . . . .

45
2

47

5
115
—

480

2
—

2

12

—

43
437
—

492

10
59

69

—

—

1
23
—

24

1
5

6

9,793

352

360

3

571
6,907
—

18,755

55
61

116

6
138
—

504

3
5

8

Total . . . . . . . . . . . . . . . . . . . . . . . . .

$18,310

$482

$561

$30

$18,871

$512

184

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

(at December 31, 2015, in millions)

Fixed  maturities
U.S. Treasury securities  and  obligations
of  U.S. government and  government
agencies  and authorities . . . . . . . . . .
Obligations  of states,  municipalities  and
political  subdivisions . . . . . . . . . . . . .

Debt  securities  issued  by foreign

governments . . . . . . . . . . . . . . . . . . .

Mortgage-backed  securities,

collateralized  mortgage  obligations
and  pass-through  securities . . . . . . . .
All  other  corporate bonds . . . . . . . . . . .
Redeemable  preferred  stock . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . .

11,126

Equity  securities
Public common  stock . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . .

Total  equity  securities . . . . . . . . . . . .

48
47

95

Less than 12 months

12 months or  longer

Total

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

$ 1,820

$ 15

$

28

$

928

172

473
7,725
8

7

1

4
197
—

224

6
3

9

142

—

57
710
—

937

33
38

71

1

2

—

2
91
—

96

1
3

4

$ 1,848

$ 16

1,070

172

530
8,435
8

12,063

81
85

166

9

1

6
288
—

320

7
6

13

Total

. . . . . . . . . . . . . . . . . . . . . . . .

$11,221

$233

$1,008

$100

$12,229

$333

The following  table  summarizes,  for  all fixed maturities and equity securities reported at fair value

for which fair  value  is  less than 80% of  amortized cost at December 31, 2016, the gross unrealized
investment loss by  length  of  time  those  securities  have  continuously been in an unrealized loss position
of  greater than  20% of  amortized cost:

(in millions)

Fixed  maturities

Period For  Which Fair Value Is Less Than 80% of Amortized Cost

Greater Than Greater Than

3 Months,
6 Months
or Less

6  Months,
12 Months
or Less

3 Months
or Less

Greater Than
12 Months

Total

Mortgage-backed  securities . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  fixed  maturities . . . . . . . . . . . . . . .
Equity  securities . . . . . . . . . . . . . . . . . . . . .

$—
1

1
1

Total

. . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2

$—
—

—
—

$—

$—
—

—
—

$—

$—
2

2
—

$ 2

$—
3

3
1

$ 4

These  unrealized losses at December  31,  2016  represented  less than  1% of the  combined  fixed

maturity and  equity  security portfolios on  a pre-tax basis and  less  than  1% of shareholders’  equity on
an  after-tax basis.

185

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

Impairment  Charges

Impairment charges included  in net realized  investment gains  in  the  consolidated  statement of

income  were as follows:

(for the year ended December 31, in  millions)

2016

2015

2014

Fixed  maturities

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

agencies  and authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$— $— $—
Obligations  of  states,  municipalities  and political subdivisions . . . . . . . . . . . . . . . . — — —
Debt  securities  issued  by foreign  governments . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —
Mortgage-backed  securities,  collateralized  mortgage  obligations  and  pass-through

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —
13

1
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

15

Total  fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

13

16

Equity  securities

Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9
9
37
3 — —

Total  equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

2

37

2

9

1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29

$52

$26

The following  tables  present  the  cumulative amount  of and the changes during  the year in credit

losses on fixed maturities held  at  December 31, 2016 and 2015, that were recognized in the
consolidated statement of  income  from  other-than-temporary impairments  (OTTI) and for which a
portion of the  OTTI  was  recognized  in  other comprehensive income (loss) in the  consolidated balance
sheet.

Year  ended December 31, 2016
(in  millions)

Losses

Where No

Recognized for Credit Losses
Securities Held,
Beginning of
Period

Were
Previously
Recognized

Where Credit
Losses Have
Been
Previously
Recognized

Due to
Sales/Defaults
of Credit-
Impaired
Securities

Cumulative
OTTI Credit OTTI  Securities OTTI Securities Reductions

Additions for

Additions for

Adjustments to
Book  Value
of Credit-
Impaired
Securities due
to  Changes in
Cash Flows

Cumulative  OTTI
Credit Losses
Recognized for
Securities Still
Held, End of
Period

Fixed maturities
Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities .

. . . . . . . . . . . . . . . .

.

All other corporate bonds

. .
. . . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . . .

$32
51

$83

$—
13

$13

$—
—

$—

$—
(7)

$(7)

$(1)
(3)

$(4)

$31
54

$85

186

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

Year  ended December 31,  2015
(in  millions)

Losses

Where No

Recognized for Credit Losses
Securities Held,
Beginning of
Period

Were
Previously
Recognized

Where Credit
Losses Have
Been
Previously
Recognized

Due to
Sales/Defaults
of Credit-
Impaired
Securities

Cumulative
OTTI Credit OTTI  Securities OTTI Securities Reductions

Additions for

Additions for

Adjustments to
Book  Value
of Credit-
Impaired
Securities due
to  Changes in
Cash Flows

Cumulative  OTTI
Credit Losses
Recognized for
Securities Still
Held, End of
Period

Fixed maturities
Mortgage-backed securities, collateralized
mortgage obligations and pass-through
securities .

. . . . . . . . . . . . . . . .

.

All other corporate bonds

. .
. . . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . . .

Concentrations and Credit Quality

$40
59

$99

$—
2

$ 2

$—
—

$—

$ (6)
(4)

$(10)

$(2)
(6)

$(8)

$32
51

$83

Concentrations  of credit  risk arise  from  exposure to  counterparties that are engaged  in similar
activities and  have similar economic  characteristics that  could cause their  ability to meet contractual
obligations to  be  similarly  affected by  changes  in economic or other conditions. The Company seeks  to
mitigate  credit risk  by  actively  monitoring  the creditworthiness of  counterparties,  obtaining collateral as
deemed  appropriate  and  applying controls that include  credit approvals, limits of credit exposure  and
other  monitoring  procedures.

At December 31, 2016,  other than  U.S. Treasury  securities  and obligations of U.S. government and
government  agencies  and  authorities,  the Company  was  not exposed to any  concentration of credit  risk
of  a  single issuer  greater than  5%  of  the Company’s  shareholders’ equity. At December 31, 2015,  other
than U.S. Treasury  securities,  obligations  of  U.S. government and government agencies and authorities,
and  obligations  of the  Canadian government, the  Company was not exposed to any concentration of
credit  risk of a  single issuer  greater than 5% of the Company’s shareholders’  equity.

Included  in  fixed maturities  are below investment grade securities totaling  $1.76 billion and
$1.71  billion  at  December  31,  2016  and  2015,  respectively. The Company defines its below investment
grade  securities  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 securities include  below
investment grade  bonds that  are publicly traded and certain other  privately issued bonds that are
classified  as  below investment  grade  loans.

187

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

3.  INVESTMENTS (Continued)

Net Investment  Income

(for the year ended December 31, in  millions)

2016

2015

2014

Gross  investment income
Fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term  securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real  estate investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross investment income . . . . . . . . . . . . . . . . . . . . . . .
Investment  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,981
37
29
51
242

2,340
38

$2,091
39
12
48
230

2,420
41

$2,244
40
9
44
489

2,826
39

Net investment income . . . . . . . . . . . . . . . . . . . . . . . .

$2,302

$2,379

$2,787

Changes  in net  unrealized  gains  on investment  securities that are included as a separate

component of  other comprehensive income (loss) were as follows:

(at and for the year ended December 31, in millions)

2016

2015

2014

Changes in net unrealized  investment  gains
Fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Change  in net pre-tax unrealized gains  on  investment

securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related  tax  expense  (benefit) . . . . . . . . . . . . . . . . . . . . .

Change  in net unrealized gains  on  investment securities
Balance, beginning  of year . . . . . . . . . . . . . . . . . . . . . . .

$ (915) $ (893) $ 913
63
2

(143)
2

51
2

(862)
(303)

(559)
1,289

(1,034)
(357)

(677)
1,966

978
334

644
1,322

Balance, end  of  year . . . . . . . . . . . . . . . . . . . . . . . . .

$ 730

$ 1,289

$1,966

Derivative  Financial  Instruments

From  time  to  time,  the  Company enters into  U.S. Treasury note futures contracts  to modify the

effective  duration  of  specific  assets  within the  investment portfolio. U.S. Treasury futures contracts
require a  daily  mark-to-market  and  settlement with the broker. At  both December 31, 2016 and  2015,
the  Company  had $400  million  notional value  of open U.S. Treasury futures contracts. Net realized
investment losses related to  U.S. Treasury  futures contracts in 2016, 2015 and 2014 were not significant.

The Company also  sells  a  small amount of U.S. equity index put option contracts that are  settled
for cash  upon their  expiration  or when  they  are  rolled over. Net realized investment losses related  to
these derivatives  in 2016,  2015 and 2014  were not  significant.

188

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS

The Company’s  estimates of fair  value for  financial assets and financial  liabilities are  based  on the

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

• Level  1—Unadjusted  quoted  market prices for  identical  assets or liabilities  in  active  markets that

the  Company  has  the ability to  access.

• Level  2—Quoted  prices  for  similar assets or liabilities  in active markets;  quoted prices for

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

• Level  3—Valuations  based  on  models where  significant inputs are not  observable.  The

unobservable  inputs  reflect  the  Company’s own  assumptions about the inputs that market
participants would  use.

Valuation  of  Investments  Reported  at Fair  Value in Financial Statements

The fair  value  of  a financial instrument  is  the estimated  amount  at  which  the instrument could be

exchanged in an orderly  transaction  between knowledgeable, unrelated,  willing parties,  i.e., not in a
forced  transaction.  The estimated fair  value of a  financial instrument  may differ  from the  amount  that
could be realized  if the  security was sold  in an immediate  sale,  e.g., a forced  transaction. Additionally,
the  valuation  of  investments  is  more  subjective  when markets  are  less liquid due  to  the lack of market
based  inputs,  which may  increase the  potential that  the estimated  fair value  of an  investment  is not
reflective of the price  at which an  actual transaction would  occur.

For  investments  that have quoted market prices in active  markets, the  Company uses the
unadjusted quoted market  prices as fair  value  and includes  these prices  in the  amounts  disclosed in
Level 1  of the hierarchy. The Company  receives the quoted  market  prices  from third  party,  nationally
recognized pricing services.  When  quoted  market  prices are unavailable, the Company  utilizes  these
pricing services  to determine  an estimate  of  fair value.  The fair  value estimates provided  from  these
pricing services  are  included in the amount disclosed in  Level  2  of  the hierarchy. If  quoted market
prices  and an estimate  from a  pricing service are unavailable,  the Company produces  an estimate of
fair  value based  on  internally  developed valuation techniques, which,  depending  on the level  of
observable  market  inputs, will render  the fair  value estimate as  Level  2  or  Level  3. The Company  bases
all of  its  estimates  of  fair  value for assets on the bid price as  it represents what  a  third-party market
participant would  be willing  to pay  in  an  arm’s length transaction.

189

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS  (Continued)

Fixed  Maturities

The Company  utilized  a pricing service  to  estimate fair value  measurements  for approximately 98%

of  its fixed maturities  at  both  December  31, 2016 and  2015. The  pricing service  utilizes market
quotations for  fixed maturity  securities  that have quoted prices  in  active markets. Since fixed  maturities
other  than U.S. Treasury  securities generally do not trade  on  a  daily  basis,  the pricing service prepares
estimates  of fair value measurements  for  these securities using  its  proprietary pricing  applications,
which include  available  relevant  market  information, benchmark  curves,  benchmarking  of like  securities,
sector  groupings  and matrix  pricing.  Additionally, the  pricing  service uses  an Option Adjusted  Spread
model to develop prepayment  and  interest rate scenarios.

The pricing  service evaluates each asset class based  on relevant  market  information, relevant  credit

information, perceived market movements and  sector news.  The  market  inputs  utilized  in the  pricing
evaluation, listed  in  the  approximate  order of priority,  include:  benchmark  yields,  reported  trades,
broker/dealer quotes,  issuer spreads,  two-sided markets, benchmark securities, bids, offers,  reference
data, and  industry  and economic  events.  The  extent  of  the  use of each  market input depends  on the
asset class and the  market  conditions.  Depending  on the  security, the  priority  of  the  use  of  inputs  may
change or  some  market  inputs may not  be relevant. For some  securities,  additional  inputs  may be
necessary.

The pricing  service utilized  by the Company has indicated  that  it  will  only  produce an  estimate  of

fair  value if there  is  objectively verifiable information to produce  a valuation.  If the  pricing service
discontinues  pricing  an  investment,  the  Company  would be  required  to  produce  an estimate of fair
value using  some  of  the same methodologies as the pricing service  but would have to make
assumptions for any  market-based inputs  that  were unavailable  due to market conditions. The Company
reviews  the estimates  of  fair value  provided by  the pricing service  and  compares the  estimates  to the
Company’s knowledge of the market  to  determine if the  estimates obtained are  representative of the
prices  in  the  market. In  addition, the  Company  has periodic  discussions with  the pricing  service to
discuss and understand any changes  in  process and their responsiveness  to  changes  occurring in  the
markets. The Company also  monitors  all  monthly price changes  and  further evaluates any  securities
whose  value changed more  than  10%  from the  prior  month.  The  Company  has implemented various
other  processes  including randomly  selecting  purchased or  sold  securities  and  comparing execution
prices  to the estimates from the pricing  service  as well as reviewing  securities whose valuation  did  not
change from their  previous valuation  (stale  price  review).  The  Company also  uses  a second
independent pricing service to further  test the  primary pricing service’s  valuation  of  the Company’s
fixed  maturity  portfolio.  These processes have not  highlighted  any  significant  issues with the  fair value
estimates  received  from  the  primary  pricing  service.

The fair value  estimates  of most fixed  maturity investments are based  on observable  market

information rather  than  market  quotes.  Accordingly, the estimates  of  fair  value  for such fixed
maturities, other than  U.S.  Treasury  securities, provided  by the pricing  service  are included  in the
amount disclosed  in Level  2  of the  hierarchy.  The estimated fair  value of  U.S. Treasury  securities  is
included  in  the amount  disclosed  in Level 1 as  the estimates are based on  unadjusted  market prices.

The Company  also holds  certain fixed maturity investments  which  are  not priced by  the pricing
service  and,  accordingly,  estimates  the  fair value of such fixed  maturities  using an  internal matrix that  is
based  on  market  information regarding interest rates, credit spreads and liquidity.  The  underlying
source  data for calculating the matrix of  credit spreads relative to the U.S.  Treasury curve are the  BofA

190

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS  (Continued)

Merrill  Lynch U.S. Corporate Index and the BofA  Merrill  Lynch High  Yield BB  Rated Index.  The
Company  includes  the  fair  value  estimates of these corporate bonds in  Level  2, since all  significant
inputs  are  market  observable.

While the vast  majority  of  the  Company’s fixed maturities  are  included  in Level  2, the Company
holds a number of  municipal bonds and  corporate  bonds  which are not  valued by the  pricing  service
and  estimates  the fair value of these  bonds using  an  internal pricing  matrix  with some unobservable
inputs  that are significant  to  the  valuation. Due  to the limited  amount  of  observable  market
information, the  Company  includes the  fair value  estimates  for these  particular  bonds in  Level 3.  The
fair  value of the fixed  maturities for  which the  Company  used  an  internal  pricing  matrix was
$99 million and $101  million  at  December 31, 2016 and 2015, respectively. Additionally, the Company
holds a small amount  of  other fixed  maturity  investments that  have characteristics  that  make  them
unsuitable for  matrix  pricing.  For  these  fixed maturities,  the  Company  obtains  a quote  from  a  broker
(primarily the  market  maker).  The fair  value of the fixed maturities for  which the  Company received  a
broker  quote  was $85  million  and $117  million at December 31,  2016  and  2015, respectively.  Due  to
the  disclaimers on  the quotes that indicate that the price is indicative  only,  the  Company includes  these
fair  value estimates  in Level 3.

Equity Securities—Public Common  Stock  and  Non-Redeemable Preferred  Stock

For  public  common stock and non-redeemable preferred  stocks,  the Company  receives prices from

pricing services  that are  based  on observable market  transactions  and  includes  these  estimates  in the
amount disclosed  in Level  1. When  current market quotes  in active  markets  are unavailable for certain
non-redeemable  preferred  stocks held  by the  Company, the Company receives an  estimate  of fair value
from  the  pricing services.  The services  utilize similar methodologies  to  price  the non-redeemable
preferred stocks  as  they do for the  fixed  maturities. The Company  includes  the fair  value  estimate  for
these non-redeemable preferred  stocks  in  the amount disclosed  in Level  2.

Other  Investments

The Company  holds investments  in  various  publicly-traded  securities  which are  reported  in other

investments.  These  investments include  mutual  funds  and other small holdings. The $17 million and
$18 million fair value of these  investments  at  December  31,  2016  and  2015,  respectively, was disclosed
in Level  1.  At December 31,  2016 and  2015,  the Company  held  investments  in  non-public  common  and
preferred equity  securities,  with fair value estimates  of  $36 million and  $38  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, 2016 and  2015 in  the amount  disclosed in  Level  3.

Derivatives

At December  31,  2015,  the  Company  held  $2  million  of  convertible bonds containing embedded
conversion options  that are  valued  separately  from  the host  bond contract  in the  amount  disclosed  in
Level 2—fixed  maturities.  At  December  31, 2016, the  Company  held  no  such  convertible  bonds.

191

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS  (Continued)

Fair  Value Hierarchy

The following  tables  present  the  level within the fair  value  hierarchy at which  the Company’s
financial assets and financial  liabilities  are measured on a recurring basis. An investment transferred
between  levels  during a  period  is transferred at its fair  value  as  of  the beginning  of  that period.

(at December 31, 2016, in millions)

Total

Level 1

Level 2

Level  3

Invested  assets:
Fixed  maturities

U.S. Treasury securities  and obligations  of  U.S. government and
government  agencies  and  authorities . . . . . . . . . . . . . . . . . .
Obligations  of  states,  municipalities  and political subdivisions . .
Debt  securities issued by foreign governments . . . . . . . . . . . . .
Mortgage-backed  securities,  collateralized  mortgage  obligations
and  pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,035
31,910
1,662

1,708
23,107
93

60,515

$2,035

$ — $ —
12
—

— 31,898
1,662
—

—
1,704
— 22,939
90
3

2,038

58,293

Equity  securities
Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . . . .

Total  equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

603
129

732

53

603
51

654

17

—
78

78

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,300

$2,709

$58,371

$220

(at December 31, 2015, in millions)

Total

Level 1

Level 2

Level  3

Invested  assets:
Fixed  maturities

U.S. Treasury securities  and obligations  of  U.S. government and
government  agencies  and  authorities . . . . . . . . . . . . . . . . . .
Obligations  of  states,  municipalities  and political subdivisions . .
Debt  securities  issued  by foreign  governments . . . . . . . . . . . . .
Mortgage-backed  securities,  collateralized  mortgage  obligations
and  pass-through  securities . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  corporate  bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,194
31,411
1,873

1,981
23,089
110
60,658

$2,194

$ — $ —
13
—

— 31,398
1,873
—

—
1,957
— 22,915
100
3
58,243
2,197

Equity  securities
Public common  stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable  preferred  stock . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity  securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other  investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

543
162
705

56

543
55
598

18

—
107
107

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$61,419

$2,813

$58,350

$256

192

4
168
—

184

—
—

—

36

24
174
7
218

—
—
—

38

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS  (Continued)

During the years  ended  December 31, 2016 and 2015,  the Company’s  transfers  between  Level 1

and  Level 2  were  not  significant.

The following  tables  present  the  changes in  the Level 3  fair value category  for  the  years ended

December 31, 2016 and  2015.

(in millions)

Balance  at  December 31,  2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  realized  and  unrealized  investment gains (losses):

Reported in net  realized investment  gains(1) . . . . . . . . . . . . . . . . . . .
Reported  in increases in  other  comprehensive income . . . . . . . . . . . .

Purchases, sales and  settlements/maturities:

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements/maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross  transfers  into  Level  3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross  transfers  out  of Level  3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed
Maturities

Other
Investments

$218

$ 38

Total

$256

3
2

123
(19)
(66)
19
(96)

5
3

—
(10)
—
—
—

8
5

123
(29)
(66)
19
(96)

Balance  at  December 31,  2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$184

$ 36

$220

Amount of total  realized  investment  gains (losses) for  the period

included  in  the  consolidated statement  of  income  attributable to
changes  in  the fair value of assets  still  held at the reporting  date . . . . .

$ —

$ (2)

$ (2)

(1) Includes  impairments  on  investments held at the end of the period as well as amortization on fixed

maturities.

(in millions)

Balance  at  December 31,  2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  realized  and  unrealized  investment gains  (losses):

Reported in net  realized investment  gains(1) . . . . . . . . . . . . . . . . . . .
Reported  in increases (decreases)  in other  comprehensive income . . .

Purchases, sales  and settlements/maturities:

Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements/maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross  transfers into  Level  3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross  transfers  out  of Level  3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed
Maturities

Other
Investments

$ 232

$36

Total

$ 268

1
(4)

202
(7)
(41)
21
(186)

2
1

1
(2)
—
—
—

3
(3)

203
(9)
(41)
21
(186)

Balance  at  December 31,  2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 218

$38

$ 256

Amount of total  realized  investment  gains (losses) for  the period

included  in  the consolidated statement  of  income  attributable to
changes  in  the fair value of assets still  held at the reporting  date . . . .

$ —

$ (1)

$ (1)

(1) Includes  impairments  on  investments held at the end of the period as well as amortization on fixed

maturities.

193

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

4.  FAIR  VALUE  MEASUREMENTS  (Continued)

Financial Instruments Disclosed,  But  Not  Carried, At Fair  Value

The following  tables  present  the  carrying  value and  fair value of the  Company’s  financial assets

and  financial  liabilities disclosed, but  not carried,  at fair value, and  the  level  within  the fair  value
hierarchy at which  such assets and  liabilities  are  categorized.

(at December 31, 2016, in millions)

Financial  assets:
Short-term  securities . . . . . . . . . . . . . .
Financial  liabilities:
Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  paper . . . . . . . . . . . . . . . .

(at December 31, 2015, in millions)

Financial  assets:
Short-term  securities . . . . . . . . . . . . . .
Financial  liabilities:
Debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial  paper . . . . . . . . . . . . . . . .

Carrying
Value

Fair
Value

Level  1

Level  2

Level  3

$4,865

$4,865

$1,223

$3,607

$35

$6,337
100

$7,262
100

$ — $7,262
100

—

$—
—

Carrying
Value

Fair
Value

Level  1

Level  2

Level  3

$4,671

$4,671

$1,685

$2,958

$28

$6,244
100

$7,180
100

$ — $7,180
100

—

$—
—

The Company utilized  a pricing service to estimate fair value for approximately 98% and 99% of

short-term securities  at  December  31,  2016 and 2015, 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  December 31, 2016 and 2015.  The pricing service  utilizes market quotations  for
debt  that  have  quoted  prices  in active  markets. Since fixed maturities other than U.S.  Treasury
securities generally  do  not trade on a  daily basis,  the fair value estimates are based on market
observable  inputs and  disclosed  in Level  2 of the  hierarchy.

The Company had no material  assets  or  liabilities that were measured at fair value on a

non-recurring  basis during the  years ended  December 31, 2016 and 2015.

5.  REINSURANCE

The Company’s consolidated financial  statements reflect the effects  of assumed and ceded
reinsurance transactions. Assumed  reinsurance refers to  the acceptance of certain insurance risks that
other  insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance
risks  (along with the related  written and  earned premiums) the Company has underwritten to other
insurance companies  who agree  to share  these risks.  The primary purpose of ceded reinsurance is  to

194

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

5.  REINSURANCE  (Continued)

protect  the Company, at a  cost, from  losses in excess  of  the amount  it is prepared to  accept  and to
protect  the Company’s  capital.  Reinsurance is placed  on both  a  quota-share  and  excess-of-loss basis.
Ceded  reinsurance  arrangements do  not  discharge the  Company  as the  primary insurer, except  for
instances  where  the primary  policy or  policies  have been  novated, such  as in  certain  structured
settlement  agreements.

The Company  utilizes a  corporate catastrophe  excess-of-loss  reinsurance  treaty with  unaffiliated
reinsurers  to  manage its exposure  to  losses resulting  from  catastrophes  and to protect  its capital.  In
addition  to the  coverage  provided under this treaty, the  Company  also utilizes  catastrophe bonds to
protect  against certain  weather-related  and earthquake losses in  the  Northeastern  United  States,  and  a
Northeast catastrophe  reinsurance treaty to  protect against losses  resulting  from weather-related  and
earthquake  catastrophes  in  the  Northeastern United  States. The Company  also utilizes  excess-of-loss
treaties  to protect  against earthquake  losses  up to a  certain threshold in  Business and  International
Insurance (for certain  markets)  and for  Personal Insurance, and  several reinsurance treaties  specific to
its  international  operations.

The Company  monitors the  financial  condition  of  its  reinsurers under voluntary reinsurance

arrangements  to evaluate  the  collectability of  amounts due  from  reinsurers and as  a basis for
determining the  reinsurers with which  the Company conducts  ongoing  business. In  addition,  in the
ordinary  course  of business,  the Company may become  involved  in coverage disputes  with  its reinsurers.
Some  of  these  disputes  could  result in  lawsuits and arbitrations  brought  by  or against the  reinsurers to
determine  the  Company’s  rights  and obligations under the  various  reinsurance agreements.  The
Company  employs  dedicated  specialists  and strategies to manage reinsurance collections and  disputes.

Included  in  reinsurance  recoverables  are  amounts related  to  involuntary reinsurance arrangements.

The Company  is  required  to participate  in  various involuntary reinsurance  arrangements through
assumed  reinsurance, principally  with  regard to  residual  market  mechanisms  in  workers’  compensation
and  automobile insurance,  as well  as  homeowners’ insurance  in  certain  coastal areas. In  addition,  the
Company  provides  services for several  of these involuntary arrangements  (mandatory pools  and
associations) under which it  writes  such  residual market business directly,  then cedes  100% of this
business  to the  mandatory pool. Such  participations and servicing  arrangements are  arranged to
mitigate  credit  risk  to the  Company,  as  any ceded balances  are  jointly backed  by all  the pool  members.

Also included  in  reinsurance  recoverables are amounts related  to certain structured settlements.

Structured  settlements  are  annuities  purchased from various life insurance  companies  to settle  certain
personal physical injury  claims, of  which  workers’  compensation claims  comprise a  significant portion.
In  cases where the  Company did  not receive  a release  from  the claimant,  the structured  settlement  is
included  in  reinsurance  recoverables  and the related  claim  cost  is  included  in the  liability  for claims and
claim adjustment  expense  reserves,  as  the  Company  retains  the  contingent liability to  the claimant. If  it
is expected that the  life insurance company  is  not able to  pay,  the Company  would  recognize an
impairment  of  the related  reinsurance  recoverable if, and  to the extent,  the purchased  annuities are  not
covered by  state  guaranty  associations.  In  the event that the  life insurance company fails  to  make  the
required  annuity payments, the  Company  would be  required  to  make  such  payments.

195

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

5.  REINSURANCE  (Continued)

The following  is a  summary of  reinsurance financial  data reflected  in the  consolidated  statement of

income:

(for the year ended December 31, in  millions)

2016

2015

2014

Written  premiums
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,567
928
(1,537)

$24,939
843
(1,661)

$24,844
788
(1,728)

Total  net written  premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,958

$24,121

$23,904

Earned  premiums
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$25,262
875
(1,603)

$24,740
814
(1,680)

$24,810
743
(1,840)

Total  net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,534

$23,874

$23,713

Percentage of  assumed  earned  premiums to net  earned  premiums . . . .

3.6%

3.4%

3.1%

Ceded claims  and  claim adjustment  expenses incurred . . . . . . . . . . . .

$

762

$ 1,034

$

953

Ceded  premiums  include  the premiums  paid for coverage provided by the Company’s catastrophe

bonds.

Reinsurance  recoverables  include  amounts recoverable on  both paid and  unpaid claims  and claim

adjustment  expenses  and  were  as follows:

(at December 31, in millions)

2016

2015

Gross  reinsurance recoverables  on paid  and unpaid claims and claim adjustment

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance  for  uncollectible reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,181
(116)

$3,848
(157)

Net reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatory  pools  and  associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Structured  settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,065
2,054
3,168

3,691
2,015
3,204

Total reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$8,287

$8,910

Terrorism  Risk  Insurance  Program

The Terrorism Risk  Insurance Program  is  a Federal  program administered  by the Department  of

the  Treasury  authorized through December 31,  2020  that provides for a  system of shared public and
private  compensation for  certain insured losses  resulting from certified acts of terrorism.

In  order for a  loss to  be covered under the program (subject losses), the loss must meet certain

aggregate industry  loss  minimums and  must be the result  of an event that is certified as an act  of
terrorism by the  U.S.  Secretary of  the  Treasury, in consultation  with the Secretary of Homeland
Security  and  the Attorney General of  the United States.  The annual aggregate industry loss minimum
under  the  program is  $140 million  for 2017, but  will increase over  the life of the program to

196

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

5.  REINSURANCE  (Continued)

$200 million  by  December 31, 2020.  The program excludes  from participation  the following  types of
insurance: Federal crop  insurance, private mortgage insurance, financial guaranty  insurance, medical
malpractice  insurance,  health or  life  insurance, flood insurance, reinsurance,  commercial  automobile,
professional  liability  (other  than  directors and officers’), surety, burglary  and theft,  and  farm-owners
multi-peril.  In the  case of a  war  declared by  Congress, only  workers’  compensation  losses  are covered
by  the program.  All  commercial property and casualty  insurers licensed in  the  United  States are
generally  required  to  participate  in the  program. Under  the  program,  a participating  insurer,  in
exchange for making  terrorism  insurance available,  is  entitled  to  be  reimbursed  by  the Federal
Government for  83%  of  subject  losses  in  2017,  after an insurer deductible,  subject to  an annual  cap.
This reimbursement percentage  will  decrease over the remaining  four-year life  of the  program to  80%
of  subject  losses  by  December  31, 2020.

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 $2.45 billion  for  2017.  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. There  have  been  no  terrorism-related losses that  have
triggered program  coverage since  the  program was  established.  Since the law is  untested, there  is
substantial uncertainty  as  to how  it  will  be  applied  if  an act of terrorism  is  certified  under  the  program.
It  is  also possible that  future legislative  action could change  or  eliminate 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.  In addition, the  Company may  not have
sufficient resources to  respond  to  claims  arising  from a high  frequency  of  high severity  natural
catastrophes  and/or  of  man-made  catastrophic events  involving conventional means.  While the
Company  seeks  to manage  its  exposure  to man-made  catastrophic events  involving  conventional means,
the  Company may  not have sufficient  resources to respond  to  claims arising out  of  one or  more
man-made catastrophic events  involving  nuclear,  biological,  chemical  or  radiological  means.

6.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table  presents the carrying amount of the Company’s  goodwill  by  segment:

(at December 31, in millions)

2016

2015

Business and International Insurance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond &  Specialty  Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,446
496
612
26

$2,439
496
612
26

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,580

$3,573

(1) Includes  goodwill  associated with the Company’s international business which is  subject to the

impact of changes in  foreign currency exchange  rates.

197

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

6.  GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

Other  Intangible  Assets

The following  tables  present  a  summary of the Company’s  other  intangible assets by major asset

class:

(at December 31, 2016, in millions)

Subject to  amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not  subject  to amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(at December 31, 2015, in millions)

Subject to  amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not  subject  to amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross
Carrying
Amount

$210
217

$427

Gross
Carrying
Amount

$210
217

$427

Accumulated
Amortization

$159
—

$159

Accumulated
Amortization

$148
—

$148

Net

$ 51
217

$268

Net

$ 62
217

$279

(1) Intangible  assets  subject  to amortization are comprised of fair value adjustments on claims and
claim adjustment expense reserves,  reinsurance  recoverables  and other contract and customer-
related  intangibles.  Fair value  adjustments  recorded  in connection with insurance  acquisitions were
based  on  management’s  estimate of  nominal  claims and claim adjustment expense  reserves and
reinsurance  recoverables.  The method used  calculated  a risk adjustment  to a risk-free discounted
reserve  that  would, if reserves  ran  off  as expected, produce results that yielded the assumed
cost-of-capital  on  the capital supporting  the loss reserves. The fair value adjustments are reported
as other  intangible  assets  on  the  consolidated  balance sheet, and the amounts measured in
accordance with  the acquirer’s accounting  policies for insurance contracts have been reported as
part  of  the claims  and  claim  adjustment expense reserves and reinsurance recoverables. The
intangible  assets are being recognized into income over the expected payment pattern. Because  the
time value  of money  and  the  risk  adjustment  (cost of capital) components of the intangible assets
run off at  different rates,  the  amount  recognized in  income may be a net benefit in some periods
and  a  net expense  in other periods.

Amortization  expense  of intangible  assets was  $11 million, $26 million and  $46 million for the
years  ended  December 31,  2016, 2015  and 2014,  respectively. Intangible asset amortization expense  is
estimated to be $9  million in 2017,  $8  million  in 2018,  $6 million in 2019, $5 million in  2020  and
$5 million in  2021.

198

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES

Claims  and  claim adjustment  expense  reserves were as  follows:

(at December 31, in millions)

2016

2015

Property-casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accident and health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$47,929
20

$48,272
23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$47,949

$48,295

The following  table  presents a reconciliation of  beginning and ending property casualty reserve

balances for  claims  and  claim  adjustment  expenses:

(at and for the year ended December 31,  in millions)

2016

2015

2014

Claims  and claim  adjustment  expense  reserves  at beginning of  year . . . . .
Less  reinsurance  recoverables on  unpaid losses . . . . . . . . . . . . . . . . . . .

$48,272
8,449

$49,824
8,788

$50,865
9,280

Net  reserves  at beginning  of  year . . . . . . . . . . . . . . . . . . . . . . . . . .

39,823

41,036

41,585

Estimated claims  and  claim  adjustment  expenses  for claims arising in the
current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Estimated decrease  in  claims and  claim  adjustment expenses for claims

15,675

14,471

14,688

arising  in  prior  years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(680)

(817)

(885)

Total  increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,995

13,654

13,803

Claims  and claim  adjustment  expense  payments  for claims  arising in:

Current  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior  years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,220
8,576

5,725
8,749

5,895
8,171

Total  payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,796

14,474

14,066

Acquisition(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign  exchange  gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
(74)

2
(395)

—
(286)

Net  reserves  at end of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus  reinsurance  recoverables  on  unpaid losses . . . . . . . . . . . . . . . . . . . .

39,948
7,981

39,823
8,449

41,036
8,788

Claims  and claim  adjustment  expense  reserves  at end of year . . . . . . . . .

$47,929

$48,272

$49,824

(1) Amount  represents  acquired net claims  and claim adjustment expense reserves of  Travelers

Participa¸c˜oes  em  Seguros  Brasil S.A. at October 1,  2015.

Gross  claims and claim  adjustment expense reserves at December 31, 2016 decreased by

$343 million from  December 31, 2015.  This decrease primarily reflected  the  impacts  of  (i) payments
related  to  operations in  runoff, including the Company’s $524 million  payment  related  to  the  settlement
of  the PPG Industries,  Inc.  litigation and (ii) net favorable prior year reserve  development,  partially
offset  by the  impacts of  (iii) higher  volumes  of insured exposures and (iv)  loss cost  trends  for  the
current accident  year.  Gross claims  and  claim  adjustment  expense  reserves  at December  31,  2015
decreased  by  $1.55  billion  from  December  31,  2014.  This  decrease  primarily  reflected  the  impacts  of
(i)  payments related  to  operations in  runoff, including a $579  million  payment related to  the settlement
of  the Asbestos Direct Action Litigation  as  described  in more detail  in  note  16, (ii)  net favorable  prior

199

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

year reserve development  and (iii)  changes in foreign  currency  exchange  rates,  partially  offset by
(iv)  the impact  of  loss  cost  trends  for  the  current  accident  year.

Reinsurance  recoverables on  unpaid  losses at December 31,  2016  decreased by  $468  million from

December 31, 2015,  primarily  reflecting  the impact  of  cash  collections  in  2016, including the  settlement
of  a  reinsurance dispute  which is  discussed  in more detail  in  note  16. Reinsurance  recoverables  on
unpaid losses  at December 31, 2015  decreased by $339 million  from  December  31, 2014, primarily
reflecting the impact  of  cash  collections  in  2015.

Included  in  the claims  and  claim  adjustment  expense reserves  are  reserves for  long-term disability

and  annuity claim  payments, primarily  arising from workers’ compensation  insurance and  workers’
compensation excess  insurance  policies,  that  are  discounted  to  the present value of  the estimated future
payments. The discount rate used was 5% at both December 31, 2016 and  2015. Total  reserves  net  of
the  discount  were $2.17  billion  and  $2.13  billion, and  the related  amount of  discount was  $1.08  billion
and  $1.07 billion,  at  December  31,  2016  and 2015, respectively. Accretion  of  the  discount  is reported as
part  of  ‘‘claims  and  claim  adjustment  expenses’’ in the  Consolidated Statement of Income.

Prior Year Reserve Development

The following  disclosures  regarding reserve development are on  a  ‘‘net  of reinsurance’’ basis.

2016.

In  2016, estimated  claims and  claim adjustment expenses  incurred  included  $680  million of  net
favorable development  for claims  arising in  prior  years,  including $771 million of net  favorable prior
year reserve development  impacting  the  Company’s results of operations  and  $50  million  of  accretion
of  discount.

Business  and International  Insurance. Net favorable prior year reserve development  in 2016

totaled  $484  million,  primarily  driven  by  better than expected loss  experience  in the Company’s
domestic operations  in (i)  the  workers’  compensation  product line for accident years 2006 and prior  as
well as  accident  years  2009,  2013 and  2015  and (ii) the general liability  product line (excluding an
increase to  asbestos  and environmental  reserves discussed below), related to both primary and excess
coverages for accident years 2007  and  prior, accident year 2009 and accident years 2011 through 2015,
as well  as  in  the Company’s  international  operations in Europe and Canada. These  factors contributing
to net  favorable  prior year  reserve development in  2016  were partially offset  by $225 million  and
$82 million increases to asbestos  and  environmental  reserves,  respectively, which are discussed in
further detail  in  the  ‘‘Asbestos and Environmental  Reserves’’ section below.

Bond  & Specialty Insurance. Net favorable prior year reserve development in 2016 totaled
$326 million, primarily driven by better  than expected loss experience in  (i) the fidelity and surety
product  line for  accident years  2009  through 2015 and  (ii) the general liability product line for accident
years  2006  through 2011.

Personal Insurance. Net unfavorable prior year reserve development  in 2016 totaled  $39 million,

primarily  driven by worse  than  expected  loss experience in  the automobile product line for bodily injury
coverages for the  2015  accident  year.

200

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

2015.

In  2015, estimated  claims and  claim adjustment expenses  incurred  included  $817  million of  net
favorable development  for claims  arising in  prior  years,  including $941 million of net  favorable prior
year reserve development  impacting  the  Company’s results of operations  and  $51  million  of  accretion
of  discount.

Business  and International  Insurance. Net favorable prior year reserve development  in 2015

totaled  $405  million,  primarily  driven  by  better than expected loss  experience  in the Company’s
domestic operations  in (i)  the  general  liability product line  (excluding increases to asbestos and
environmental reserves discussed  below),  for both primary and excess coverages for accident years 2005
through  2013, (ii) the  workers’ compensation line of business for accident years 2006 and prior,  (iii)  the
property product line  related to catastrophe  losses for accident years 2011, 2012 and 2014 and
non-catastrophe  losses  for  accident years 2013 and 2014, as well as in the  Company’s operations in
Canada and at  Lloyd’s.  These  factors  contributing to net  favorable prior year reserve development in
2015 were partially offset by  $224 million  and $72  million increases to  asbestos and environmental
reserves, respectively,  which  are  discussed in further detail in  the ‘‘Asbestos and Environmental
Reserves’’ section  below.

Bond  & Specialty Insurance. Net  favorable prior year reserve development in 2015 totaled

$258 million, primarily driven  by better  than expected loss experience in  the fidelity and surety product
line  for  accident  years  2008  through  2014,  which was partially driven  by a reduction in outstanding
exposures related  to the financial crisis  that commenced in 2007.

Personal Insurance. Net  favorable  prior year reserve development in  2015  totaled $278 million,
primarily  driven by better  than  expected  loss experience  in  (i) the Homeowners  and Other product line
for liability  coverages  for accident years  2011 through  2014,  for  non-catastrophe weather-related losses
and  non-weather-related  losses for  accident year 2014 and (ii) the Automobile product line for liability
coverages for accident years 2012  through 2014.

2014.

In  2014,  estimated claims  and  claim adjustment  expenses incurred included  $885 million of  net
favorable development for  claims  arising  in prior years, including $941 million of net  favorable prior
year reserve development  impacting  the  Company’s  results of operations  and  $50 million of accretion
of  discount.

Business  and  International Insurance. Net favorable prior year reserve development  in 2014

totaled  $322 million,  primarily driven  by  (i)  better than  expected loss experience in the Company’s
domestic operations  in the general liability product line (excluding increases to asbestos and
environmental reserves discussed  below),  primarily related to excess coverages for accident years 2008
through  2012, (ii) a  $162  million benefit  resulting from better than expected loss experience related to,
and  the  commutation of reinsurance treaties associated  with, a workers’ compensation reinsurance  pool
for accident years  1996  and  prior, and  better than expected loss experience  in the Company’s domestic
operations in  (iii)  the  property  product  line for accident years 2010 through 2013,  including  catastrophe
losses from Storm  Sandy  for accident  year  2012  and (iv) the commercial auto product line for accident
years  2011  and 2012.  These factors contributing  to net  favorable prior year reserve development in

201

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

2014 were partially  offset  by  (i)  $250  million and $87 million increases  to  asbestos  and environmental
reserves, respectively, which  are  discussed in  further detail in  the ‘‘Asbestos and Environmental
Reserves’’ section below, (ii)  an increase  in  unallocated loss  adjustment  expense reserves  of  $77 million
for interest awarded  as  part of damages  pursuant to  a court decision  in  the third  quarter of  2014
related  to  a legal matter, which  is discussed  in more  detail  in the  ‘‘Settlement of Asbestos Direct
Action  Litigation’’ section of note  16  and (iii) higher than  expected loss experience for liability
coverages in  the commercial  multi-peril  product  line for  accident years  2010  through  2013.

Bond  & Specialty  Insurance. Net  favorable prior year reserve development  in 2014 totaled
$450 million,  primarily  driven  by better  than expected  loss  experience  in  the contract  surety product
line  for  accident  years 2012 and prior.

Personal  Insurance. Net  favorable prior year reserve development in 2014 totaled $169 million,
primarily  driven  by  better than  expected  loss experience  in  the Homeowners  and Other product line  for
(i)  non-catastrophe weather-related losses  for accident year  2013  and (ii) catastrophe  losses for  accident
years  2011  through  2013.

202

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Claims  Development

The following  is a  summary of  claims and claim adjustment  expense reserves, including certain

components, for  the  Company’s  major  product lines by reporting  segment at  December  31, 2016.

At December 31, 2016 (in millions)

Business and  International

Insurance
General liability . . . . . . . . . . . .
Commercial  property . . . . . . . . .
Commercial  multi-peril
. . . . . . .
Commercial automobile . . . . . . .
Workers’ compensation(1) . . . . .
International—Canada . . . . . . . .

Bond & Specialty Insurance

General liability . . . . . . . . . . . .
Fidelity and surety . . . . . . . . . . .

Personal Insurance

Automobile . . . . . . . . . . . . . . . .
Homeowners (excluding Other)
.
Subtotal—claims and allocated

claim adjustment expenses for
the products presented  in  the
development tables below . . . .
Other insurance contracts(2) . . . . .
Unallocated loss adjustment

expense  reserves . . . . . . . . . . . .
Structured settlements(3) . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . .
Total property-casualty . . . . . . .
Accident and health . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .

Total

Net Undiscounted
Claims and Claim
Adjustment Expense
Reserves

Subtotal:
Net  Claims  and
Reinsurance
Allocated Claim
Recoverables on
Adjustment
Reinsurance) Expense Reserves Unpaid Losses

Discount
(Net of

Claims  and
Claim
Adjustment
Expense
Reserves

$ 7,034
866
3,414
2,270
15,439
1,482

2,042
450

2,277
742

36,016
2,955

1,936
—
44
40,951
—
$40,951

$ (168)
—
—
—
(832)
—

—
—

—
—

(1,000)
(3)

—
—
—
(1,003)
—
$(1,003)

$ 6,866
866
3,414
2,270
14,607
1,482

2,042
450

2,277
742

35,016
2,952

1,936
—
44
39,948
—
$39,948

$ 712
194
81
256
729
157

82
17

465
2

2,695
2,058

40
3,168
20
7,981
20
$8,001

$ 7,578
1,060
3,495
2,526
15,336
1,639

2,124
467

2,742
744

37,711
5,010

1,976
3,168
64
47,929
20
$47,949

(1) Net discount amount includes discount  of $80  million on reinsurance  recoverables  for long-term

disability and  annuity claim payments.

(2) Primarily includes residual  market, non-Canadian international  and runoff  assumed reinsurance

business.
Includes structured settlements  in  cases where the  Company did  not  receive  a release  from the  claimant.

(3)

The  claim  development  tables  that  follow  present,  by  accident  year,  incurred  and  cumulative  paid

claims  and allocated  claim adjustment  expense on a  historical basis. This  claim development
information is  presented  on  an undiscounted,  net of  reinsurance  basis  for ten  years, or the number  of
years  for  which claims incurred typically  remain  outstanding if less than ten years. The claim
development tables also provide the  historical  average annual  percentage  payout of incurred claims by
age, net of reinsurance, as supplementary  information (identified as unaudited in the tables below). The
claim development  information  reflects  the acquisition  of The  Dominion of Canada General Insurance
Company  (Dominion)  in November  2013 on  a retrospective basis (includes Dominion data for years
prior to the Company’s acquisition  of  Dominion).

203

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Business  and  International  Insurance

General  Liability

(dollars in millions)

For  the  Years  Ended December 31,

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Incurred  Claims and  Allocated Claim  Adjustment  Expenses,  Net  of  Reinsurance

Unaudited

Accident Year

1,143

2007 . . . . . . $1,136 $1,162 $1,087 $1,089 $ 968 $ 919 $ 888
994
1,209
2008 . . . . . .
869
2009 . . . . . .
1,060
959
2010 . . . . . .
1,065
2011 . . . . . .
985
2012 . . . . . .
2013 . . . . . .
965
2014 . . . . . .
2015 . . . . . .
2016 . . . . . .

1,041
960
1,021
1,074
989

1,079
1,028
1,031
1,004

1,222
1,071
1,028

IBNR
Reserves
Dec. 31,
2016

Cumulative
Number of
Reported
Claims

$883
946
837
927
998
935
975
976

$865
931
809
912
972
913
958
989
998

$ 824
935
796
918
935
892
940
983
956
1,075

$

78
88
95
108
146
184
256
438
592
908

23,840
25,385
25,457
27,678
27,210
24,384
21,836
20,926
18,771
13,810

Total

$9,254

Cumulative Paid Claims and  Allocated Claim  Adjustment  Expenses,  Net  of Reinsurance

Unaudited

Accident Year

2007 . . . . . . $
2008 . . . . . .
2009 . . . . . .
2010 . . . . . .
2011 . . . . . .
2012 . . . . . .
2013 . . . . . .
2014 . . . . . .
2015 . . . . . .
2016 . . . . . .

35

154
35

32 $ 134 $ 316 $ 467 $ 549 $ 632 $ 682
694
359
543
167
487
35
355
150
35

615
446
324
187
32

497
314
139
47

$697
734
613
629
539
295
175
37

$713
759
643
702
660
489
363
163
36

$ 726
799
667
756
725
589
498
321
137
35

Liability  for  Claims
And  Allocated Claim
Adjustment  Expenses,
Net  of Reinsurance

2007 -
2016

Before
2007

Total

$5,253

$4,001

$3,033

Total net  liability

$7,034

Average  Annual  Percentage  Payout  of  Incurred  Claims  by  Age,  Net  of  Reinsurance

Years

1

2

3

4

Unaudited
6
5

7

8

9

10

3.9% 13.3% 19.1% 17.6% 12.4% 8.4% 5.0% 2.5% 3.1% 1.6%

204

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Commercial  Property

(dollars in millions)

For the Years Ended  December 31,

2012

2013

2014

2015

2016

Incurred  Claims and  Allocated Claims
Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

$1,054

$988
789

$924
755
936

IBNR
Reserves
Dec. 31,
2016

Cumulative
Number of
Reported
Claims

$ 13
10
15
28
131

28,183
22,141
21,490
19,859
19,327

$889
737
860
786

$ 895
731
836
750
896
Total $4,108

Liability  for Claims
And  Allocated Claim
Adjustment Expenses,
Net  of  Reinsurance

2012  -
2016

$ 702

Before
2012

$

$

164

866

Cumulative Paid  Claims  and  Allocated Claim
Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

$ 453

$770
389

$845
610
464

$865
683
710
376

$ 872
703
775
615
441
Total $3,406

Years

Total net  liability

Average Annual Percentage Payout of
Incurred Claims by Age,  Net of Reinsurance
Unaudited
3

1

4

5

2

51.7% 31.8% 8.7% 2.5% 0.8%

205

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Commercial  Multi-Peril

(dollars in millions)

For the Years Ended  December 31,

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Incurred  Claims  and  Allocated Claim  Adjustment  Expenses, Net of Reinsurance

Unaudited

Accident Year

IBNR Cumulative
Reserves Number of
Dec. 31, Reported
Claims

2016

1,725

1,674
1,484

2007 . . . . . . . . $1,490 $1,430 $1,364 $1,402 $1,398 $1,375 $1,373 $1,369 $1,376 $ 1,369 $
2008 . . . . . . . .
2009 . . . . . . . .
2010 . . . . . . . .
2011 . . . . . . . .
2012 . . . . . . . .
2013 . . . . . . . .
2014 . . . . . . . .
2015 . . . . . . . .
2016 . . . . . . . .

1,681
1,509
1,898
2,287
1,888
1,609
1,625
1,625
1,662

1,688
1,514
1,892
2,296
1,888
1,620
1,627
1,568

1,674
1,514
1,895
2,286
1,903
1,623
1,663

1,684
1,511
1,861
2,269
1,883
1,615

1,674
1,498
1,832
2,244
1,885

1,688
1,501
1,826
2,235

1,683
1,506
1,711

51
47
42
51
66
88
122
193
354
658

96,767
108,382
103,198
111,586
125,358
104,419
82,936
76,833
68,278
56,471

Cumulative Paid Claims and  Allocated Claim  Adjustment  Expenses,  Net  of Reinsurance

Unaudited

Accident Year

Total $17,153

712

1,103
603

2007 . . . . . . . . $ 498 $ 824 $ 982 $1,110 $1,208 $1,256 $1,278 $1,296 $1,307 $ 1,312
1,617
2008 . . . . . . . .
1,449
2009 . . . . . . . .
1,798
2010 . . . . . . . .
Liability for Claims
2,156 And Allocated Claim
2011 . . . . . . . .
1,699 Adjustment Expenses,
2012 . . . . . . . .
1,304 Net  of  Reinsurance
2013 . . . . . . . .
1,154
2014 . . . . . . . .
970
2015 . . . . . . . .
585
2016 . . . . . . . .

1,602
1,436
1,763
2,088
1,590
1,167
956
595

1,581
1,408
1,698
1,979
1,424
987
628

1,551
1,360
1,579
1,803
1,246
644

1,490
1,264
1,395
1,573
795

1,396
1,121
1,180
1,060

1,264
958
709

Before
2007

2007 -
2016

Total $14,044 $3,109

$

305

Total net  liability $ 3,414

Average  Annual  Percentage  Payout  of  Incurred  Claims  by  Age,  Net  of  Reinsurance
Unaudited
6
5

10

4

2

3

1

9

8

7

Years

39.5% 22.9% 10.8% 8.8% 6.0% 3.3% 1.8% 1.1% 0.9% 0.4%

206

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Commercial  Automobile

(dollars in millions)

For the Years Ended  December 31,

2012

2013

2014

2015

2016

Incurred  Claims and  Allocated Claims
Adjustment Expenses, Net of Reinsurance

Unaudited

$1,294

$1,350
1,235

$1,327
1,236
1,165

1,240
1,166
1,198

$1,325 $1,337
1,245
1,168
1,215
1,290
Total $6,255

Cumulative Paid  Claims  and  Allocated Claim
Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

$ 467

$ 753
435

$ 960
675
397

884
618
409

$1,134 $1,235
1,039
821
658
416
Total $4,169

IBNR
Reserves
Dec. 31,
2016

Cumulative
Number of
Reported
Claims

$

35
67
131
246
516

214,780
197,041
184,067
179,963
173,790

Liability  for Claims
And Allocated  Claim
Adjustment Expenses,
Net  of  Reinsurance

2012  -
2016

$2,086

Before
2012

$

$

184

2,270

Years

Total net  liability

Average Annual Percentage Payout of
Incurred Claims by Age,  Net of Reinsurance
Unaudited
3

1

5

4

2

34.0% 20.0% 16.6% 12.7% 7.6%

207

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Workers’ Compensation

(dollars in millions)

For the Years Ended  December 31,

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

IBNR Cumulative
Reserves Number of
Dec.  31, Reported
Claims

2016

2007 . . . . . . . . . . . . $1,554 $1,519 $1,484 $1,448 $1,390 $1,373 $1,358 $1,340 $1,328 $ 1,341 $
2008 . . . . . . . . . . . .
2009 . . . . . . . . . . . .
2010 . . . . . . . . . . . .
2011 . . . . . . . . . . . .
2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

1,714 1,745 1,734 1,683 1,639 1,634 1,621 1,617
1,799 1,778 1,746 1,753 1,753 1,766 1,775
1,886 2,042 2,035 2,056 2,049 2,052
2,284 2,303 2,347 2,350 2,379
2,447 2,456 2,457 2,456
2,553 2,545 2,540
2,554 2,553
2,644

1,617
1,750
2,055
2,385
2,445
2,506
2,547
2,585
2,768

217 103,064
237 107,565
272 104,229
354 116,837
430 135,061
519 133,417
651 128,111
839 123,110
1,142 120,681
1,651 108,357

Cumulative Paid Claims and  Allocated  Claim  Adjustment  Expenses, Net of  Reinsurance

Unaudited

Total $21,999

Accident Year

274

571
288

2007 . . . . . . . . . . . . $ 216 $ 450 $ 589 $ 683 $ 747 $ 802 $ 845 $ 880 $ 910 $
2008 . . . . . . . . . . . .
2009 . . . . . . . . . . . .
2010 . . . . . . . . . . . .
2011 . . . . . . . . . . . .
2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

961 1,036 1,088 1,130
961 1,065 1,137 1,193
978 1,133 1,246 1,321
911 1,185 1,365 1,487
940 1,217 1,394
443
954 1,237
458
944
455
430

875
828
750
420

752
623
341

936
1,162
1,235
1,385
Liability  for Claims
1,583 And  Allocated Claim
1,536 Adjustment Expenses,
1,413 Net  of  Reinsurance
1,224

893 2007 -
421
2016

Before
2007

Total $11,788 $10,211 $ 5,228

Total net  liability $15,439

Years

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Unaudited
5

10

3

1

2

7

9

8

6

4

17.0% 19.2% 11.2% 7.4% 5.4% 4.1% 3.2% 2.5% 2.1% 1.9%

208

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

International—Canada

(dollars in millions)

For the Years Ended  December 31,

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2007 . . . . . . . . . . . . $632
2008 . . . . . . . . . . . .
2009 . . . . . . . . . . . .
2010 . . . . . . . . . . . .
2011 . . . . . . . . . . . .
2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

$626
681

$616
685
724

$608
670
718
715

$607
665
707
722
723

$609
658
714
721
696
664

$611
655
714
735
686
642
723

IBNR Cumulative
Reserves Number of
Dec. 31, Reported
Claims

2016

$608
651
702
724
682
631
717
665

$601
646
696
715
678
611
701
678
597

$ 597 $
642
690
706
669
616
685
682
610
612

4
5
13
20
30
50
56
83
112
102

66,327
71,803
71,671
71,437
72,063
67,320
71,183
67,935
58,238
54,948

Total

$6,509

Cumulative Paid Claims  and  Allocated Claim Adjustment  Expenses,  Net  of Reinsurance

Unaudited

Accident Year

2007 . . . . . . . . . . . . $228
2008 . . . . . . . . . . . .
2009 . . . . . . . . . . . .
2010 . . . . . . . . . . . .
2011 . . . . . . . . . . . .
2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

$355
256

$410
406
274

$450
460
419
258

$488
501
479
403
253

$524
543
525
465
380
225

$547
579
573
522
432
336
260

$561
603
608
573
481
389
388
252

$570
616
630
615
538
435
439
382
228

$ 578
622
648
641
Liability for Claims
571 And  Allocated Claim
482 Adjustment Expenses,
494
Net  of  Reinsurance
445
346
295

Before
2007

2007 -
2016

Total

$5,122 $1,387

$

95

Total net  liability

$ 1,482

Years

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Unaudited
5

10

2

1

3

9

6

4

8

7

38.9% 20.0% 8.5% 7.2% 7.2% 5.5% 3.6% 2.3% 1.2% 1.4%

The incurred and paid  amounts have been translated from the local currency to U.S. dollars using
the  December  31, 2016 spot rate  for  all  years presented in the table above in order to isolate changes
in foreign exchange rates from loss development.

209

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Bond  &  Specialty  Insurance

General  Liability

(dollars in millions)

For the  Years Ended  December 31,

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2007 . . . . . . . . .
2008 . . . . . . . . .
2009 . . . . . . . . .
2010 . . . . . . . . .
2011 . . . . . . . . .
2012 . . . . . . . . .
2013 . . . . . . . . .
2014 . . . . . . . . .
2015 . . . . . . . . .
2016 . . . . . . . . .

Accident Year

2007 . . . . . . . . .
2008 . . . . . . . . .
2009 . . . . . . . . .
2010 . . . . . . . . .
2011 . . . . . . . . .
2012 . . . . . . . . .
2013 . . . . . . . . .
2014 . . . . . . . . .
2015 . . . . . . . . .
2016 . . . . . . . . .

$584

$571
579

$638
769
592

$582
743
624
571

$551
697
665
612
565

$511
716
686
679
596
538

$479
712
680
679
639
591
510

$467
672
660
661
632
614
565
549

IBNR
Reserves
Dec.  31,
2016

Cumulative
Number of
Reported
Claims

$

4
24
24
18
34
137
204
232
272
405

11,018
6,463
6,287
5,655
5,191
4,824
4,371
4,182
3,814
2,676

$462 $ 454
631
641
653
545
601
630
563
524
512

643
655
668
601
605
606
571
528

Total $5,754

Cumulative Paid Claims and  Allocated Claim Adjustment Expenses, Net of Reinsurance

$ 35

$134
47

$229
157
36

$303
281
167
33

Unaudited

$357
387
310
152
33

$373
471
390
291
143
38

$393
529
460
396
249
160
34

$400
562
497
482
324
255
154
38

$410 $ 415
590
592
597
447
383
352
239
141
30

579
563
565
414
342
252
150
38

Liability for Claims
And  Allocated  Claim
Adjustment Expenses,
Net of  Reinsurance

2007 -
2016

Before
2007

Total $3,786

$1,968

$

74

Total net liability

$2,042

Average  Annual  Percentage  Payout  of  Incurred  Claims  by  Age,  Net  of  Reinsurance

Unaudited

Years

1

2

3

4

5

6

7

8

9

10

6.3% 19.7% 18.8% 15.1% 12.1% 7.5% 6.2% 3.0% 1.9% 1.1%

210

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Fidelity  and  Surety

Accident  Year

2012 . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . .

(dollars in millions)

For the Years Ended  December 31,

2012

2013

2014

2015

2016

Incurred Claims and Allocated Claims
Adjustment Expenses, Net of Reinsurance

Unaudited

$255

$262
240

$249
246
223

199
212
217

$175 $140
146
165
191
226
Total $868

Cumulative  Paid Claims  and  Allocated Claim
Adjustment Expenses, Net of  Reinsurance

Unaudited

Accident  Year

2012 . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . .

$ 42

$108
37

$124
113
58

128
96
32

$110 $111
131
111
75
54
Total $482

IBNR
Reserves
Dec.  31,
2016

Cumulative
Number  of
Reported
Claims

$

9
6
32
79
128

1,148
1,006
992
768
595

Liability  for Claims
And Allocated  Claim
Adjustment Expenses,
Net  of  Reinsurance

2012  -
2016

$ 386

Before
2012

$ 64

$ 450

Total net  liability

Average  Annual Percentage Payout of
Incurred Claims by Age, Net of Reinsurance
Unaudited

Years

1

2

3

4

5

26.1% 36.2% 10.1% (3.6)%(1)

0.8%

(1) Includes  recovery  activity.

211

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Personal  Insurance

Automobile

(dollars in millions)

For the Years Ended  December 31,

2012

2013

2014

2015

2016

Incurred  Claims and  Allocated Claims
Adjustment  Expenses, Net of  Reinsurance

Unaudited

$2,417

$2,454
2,108

$2,448
2,095
2,014

2,049
1,994
2,186

$2,432 $ 2,428
2,044
1,981
2,244
2,779
Total $11,476

Cumulative  Paid Claims  and Allocated  Claim
Adjustment Expenses, Net of Reinsurance

Unaudited

Accident  Year

2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

Accident Year

2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
2015 . . . . . . . . . . . .
2016 . . . . . . . . . . . .

$1,503

$1,983
1,251

$2,189
1,628
1,193

1,814
1,564
1,319

$2,311 $ 2,376
1,935
1,763
1,768
1,610
Total $ 9,452

IBNR
Reserves
Dec.  31,
2016

Cumulative
Number of
Reported
Claims

$

15
36
75
224
646

793,669
694,650
669,990
755,762
839,962

Liability  for Claims
And Allocated Claim
Adjustment  Expenses,
Net  of  Reinsurance

2012  -
2016

$2,024

Before
2012

$

$

253

2,277

Years

Total net  liability

Average Annual Percentage Payout of
Incurred Claims by Age,  Net of Reinsurance
Unaudited
3

1

5

2

4

60.0% 19.2% 9.2% 5.5% 2.7%

212

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Homeowners  (excluding  Other)

(dollars in millions)

For the Years Ended  December 31,

2012

2013

2014

2015

2016

Incurred  Claims and  Allocated Claims
Adjustment Expenses, Net of Reinsurance

Unaudited

$2,136

$2,056
1,488

$2,029
1,397
1,515

1,365
1,450
1,438

$2,018 $2,019
1,375
1,453
1,454
1,556
Total $7,857

Cumulative Paid  Claims  and  Allocated Claim
Adjustment Expenses, Net of Reinsurance

Unaudited

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

Accident Year

2012 . . . . . . . . . . . . .
2013 . . . . . . . . . . . . .
2014 . . . . . . . . . . . . .
2015 . . . . . . . . . . . . .
2016 . . . . . . . . . . . . .

$1,508

$1,901
994

$1,964
1,269
1,053

1,317
1,338
994

$1,993 $2,008
1,344
1,402
1,333
1,049
Total $ 7,136

IBNR
Reserves
Dec. 31,
2016

Cumulative
Number of
Reported
Claims

$

1
4
9
28
307

259,006
149,373
151,517
144,367
129,630

Liability  for Claims
And Allocated  Claim
Adjustment Expenses,
Net  of  Reinsurance

2012  -
2016

$ 721

Before
2012

$

$

21

742

Years

Total net  liability

Average Annual Percentage Payout of
Incurred Claims by Age,  Net of Reinsurance
Unaudited
3

1

5

4

2

71.1% 20.6% 3.7% 1.7% 0.7%

213

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Methodology  for  Estimating Incurred  But  Not Reported (IBNR)  Reserves

Claims  and  claim adjustment  expense  reserves represent management’s estimate  of  the ultimate

liability  for unpaid  losses  and loss adjustment  expenses for  claims that  have been reported  and  claims
that  have been incurred but  not  yet reported  as of the  balance sheet date. Claims  and  claim  adjustment
expense reserves  do  not represent an  exact calculation of the liability,  but  instead represent
management estimates,  primarily utilizing actuarial expertise and projection  methods  that develop
estimates  for  the  ultimate  cost  of  claims  and  claim  adjustment  expenses.  Because  the  establishment  of
claims  and claims adjustment expense  reserves  is  an inherently uncertain process involving  estimates
and  judgment,  currently estimated  claims  and claim adjustment  expense reserves  may  change.  The
Company  reflects  changes to the reserves  in the  results of  operations in the period  the  estimates  are
changed.

Cumulative  amounts  paid and case  reserves held as of the  balance  sheet  date  are subtracted from

the  estimate  of the  ultimate cost of  claims and claim adjustment  expenses to  derive  incurred  but  not
reported (IBNR) reserves.  Accordingly,  IBNR reserves include  the  cost  of  unreported  claims,
development on known  claims and  re-opened  claims. This  approach to estimating  IBNR reserves has
been in place  for  many  years,  with no  material changes  in methodology  in the past  year.

Detailed  claim  data  is  typically  insufficient to produce  a reliable indication  of the  initial estimate

for ultimate  claims  and claim  adjustment expenses  for an accident year.  As a  result,  the initial  estimate
for an accident  year  is  generally based  on an exposure-based  method using either  the  loss ratio
projection or  the expected loss method.  The loss  ratio projection  method,  which  is  typically  used for
guaranteed cost business,  develops  an  initial  estimate  of  ultimate  claims and  claim  adjustment  expenses
for an accident  year  by  multiplying earned premium for  the accident year  by  a  projected  loss  ratio. The
projected  loss ratio  is determined  by  analyzing  prior period experience,  and  adjusting  for  loss  cost
trends, rate  level  differences,  mix of  business  changes and other  known  or  observed  factors influencing
the  accident  year  relative  to prior  accident years. The expected  loss  method, which is  typically used  for
loss  sensitive  business,  develops  an initial  estimate  of  ultimate  claims  and  claim  adjustment  expenses  for
an  accident year by analyzing  exposures  by  account.

For  prior accident years,  the following estimation and analysis methods  are principally  used by  the

Company’s actuaries  to estimate the  ultimate cost  of  claims and  claim  adjustment  expenses.  These
estimation  and  analysis methods  are  typically referred to  as conventional  actuarial  methods.

• The paid loss  development  method  assumes that  the future change  (positive or  negative) in
cumulative paid losses  for a  given  cohort of claims  will occur in  a stable,  predictable pattern
from year-to-year,  consistent  with  the pattern observed in past cohorts.

• The case incurred development method is the  same as  the paid loss  development method but  is

based on cumulative  case-incurred losses  rather than  paid losses.

• The Bornhuetter-Ferguson  method uses an initial estimate  of  ultimate losses for a  given  product
line  reserve component,  typically  expressed  as a ratio to earned premium. The method assumes
that  the  ratio of  additional claim  activity to earned premium  for that component is relatively
stable and predictable  over  time and that actual  claim activity to  date is not a credible predictor
of  further activity for that  component.  The  method is used most often for more recent accident
years where  claim data is sparse and/or volatile, with  a transition to other  methods  as the
underlying claim  data  becomes more voluminous  and  therefore more credible.

214

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

• The average value  analysis  combined  with the  reported  claim  development  method  assumes that
average  claim  values  are  stable and predictable over time for a particular cohort of claims. It  is
typically limited  to  analysis  at more granular  levels, such as coverage or hazard/peril, where a
more  homogeneous subset  of claims  produce a  more stable and  fairly  predictable average value.
The reported  claim  development method  is  the same  as the  paid loss  development method but
uses  changes in  cumulative claim counts  to produce  estimates of  ultimate claim counts rather
than ultimate dollars.  The resulting estimate of ultimate claim counts by cohort is multiplied by
an  average  value  per  claim  from  an  average  value  analysis  to  obtain  estimated  ultimate  claims
and  claim  adjustment  expenses.

While  these  are  the  principal  methods  utilized,  the  Company’s  actuaries  have  available  to  them  the
full  range of actuarial methods  developed  by the casualty actuarial  profession.  The Company’s actuaries
are also  continually monitoring  developments within the  profession for  advances in  existing  techniques
or the  creation  of new techniques  that  might  improve  current  and  future estimates.  Most actuarial
methods assume  that past patterns  demonstrated in the  data  will  repeat themselves in  the  future.  For
certain  reserve  components  where  this  assumption  may not  hold,  such as  asbestos and environmental
reserves, conventional  actuarial methods  are not utilized  by the  Company.

Methodology  for  Determining Cumulative  Number  of Reported  Claims

A  claim  file  is created  when  the Company is notified of an actual demand  for  payment, notified  of
an  event  that may lead  to  a  demand for  payment  or  when  it is determined  that a  demand for  payment
could possibly  lead to  a future demand  for payment  on another  coverage on  the same policy  or on
another policy. Claim files  are generally  created for a policy at  the claimant  by coverage  level,
depending on  the particular  facts  and  circumstances  of  the  underlying event.

For  Business and  International  Insurance and for Personal Insurance,  claim file  information  is
summarized such  that  the  Company  generally  recognizes  one  count for  each  policy claim event by
internal  regulatory  line  of  business, regardless of the  number  of  claimants or  coverages involved.  The
claims  counts  are  then  accumulated and  reported  by product  line.  While the methodology is  generally
consistent within each  segment  for  the  product  lines displayed,  there  are  some  minor differences
between  and within  segments.  For  Bond &  Specialty Insurance,  the Company  recognizes one  count  per
coverage per policy claim event.

For  purposes  of the  claims  development  tables above, claims  reported  for  direct  business  are

counted even if  they eventually close with  no loss payment, except  in the  case  of (i)  deductible
business,  where the claim  is not  counted  until the  case  incurred  claim  estimate  is  above  the  deductible,
and  (ii)  International-Canada reported claim  counts where claims closed with  no loss  payment  are not
counted.  Note  that claims  with zero claim dollars  may still generate some  level  of claim adjustment
expenses.  Claim counts for assumed business are included  only to  the  extent  such  counts  are available.
The Company  generally does not  receive claim count  information for  which the underlying  claim
activity is handled by others,  including pools and associations. The  Company does  not generate  claim
counts  for  ceded  business.  The  methods  used  to  summarize  claim  counts  have  not  changed  significantly
over  the time  periods reported  in the tables above.

The Company  cautions  against using  the summarized claim  count information  provided  in  this
disclosure in  attempting  to project ultimate  loss  payouts by  product  line.  The  Company generally  finds
claim count data to  be useful only on a  more granular basis  than  the aggregated  basis disclosed  in the

215

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

claim development tables  above,  as  the  risks,  average values  and  other dynamics  of  the  claim  process
can vary materially  by  the cause of  loss  and  coverage within  product line.  For example, in  Personal
Automobile,  the  introduction  of  a  new  roadside assistance coverage  feature several years  ago resulted
in a  significant increase  in claim  counts  with a low  average  claim  cost. For  this  reason the  Company
varies  its approach  to, and  in  many cases  the level  of  aggregation for,  counting claims for  internal
analysis  purposes  depending  on the  particular granular analysis  performed.

Asbestos  and  Environmental  Reserves

At December  31,  2016 and  2015, the Company’s claims  and  claim  adjustment  expense reserves
included  $1.71  billion and $2.17  billion,  respectively, for  asbestos  and  environmental-related  claims, net
of  reinsurance.

It  is  difficult  to estimate  the  reserves  for asbestos  and environmental-related claims due  to  the

vagaries  of  court coverage decisions,  plaintiffs’ expanded  theories  of  liability,  the risks  inherent  in
complex litigation and  other  uncertainties, including, without limitation,  those  which  are set forth
below.

Asbestos  Reserves. Because  each  policyholder presents different liability and  coverage issues, the
Company generally  reviews  the  exposure presented by each policyholder at  least annually. Among the
factors which the  Company may  consider in  the course of this review are: available insurance coverage,
including the  role  of any umbrella  or  excess insurance  the Company has  issued to the policyholder;
limits  and deductibles; an  analysis of  the  policyholder’s potential liability; the jurisdictions involved;  past
and  anticipated  future claim  activity  and loss development on pending claims; past settlement values  of
similar  claims; allocated  claim  adjustment  expense; potential  role of other insurance; the role, if any, of
non-asbestos  claims  or potential  non-asbestos claims in any resolution process; and applicable coverage
defenses  or  determinations,  if  any,  including the  determination as to whether or not an  asbestos claim
is a products/completed operation claim  subject  to an aggregate limit and  the available coverage, if any,
for that  claim.

In the third  quarter of  2016,  the Company completed its  annual in-depth asbestos claim review,

including a  review  of  active policyholders and litigation  cases  for potential product and ‘‘non-product’’
liability, and  noted  the continuation  of  the  following trends:

• continued  high level  of litigation  activity in certain jurisdictions involving individuals  alleging

serious  asbestos-related  illness,  primarily involving mesothelioma claims;

• while  overall  payment  patterns have been generally  stable, there has  been an increase in severity

for certain policyholders  due  to  the continued high level of litigation activity; and

• continued moderate  level  of  asbestos-related bankruptcy activity.

In the Home Office and Field Office category, which accounts for  the vast majority of

policyholders with  active asbestos-related claims, the number of policyholders tendering asbestos claims
for the  first  time, the  number  of  policyholders with open asbestos claims and  both gross and net
asbestos-related  payments  declined  slightly when compared to 2015. Payments on behalf  of
policyholders in  this category  continue  to be influenced by the  high level of  litigation activity in a
limited number of  jurisdictions  where  individuals alleging serious asbestos-related injury, primarily

216

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

mesothelioma,  continue  to  target defendants who were not  traditionally primary  targets of asbestos
litigation.

The Company’s  quarterly  asbestos reserve reviews include  an  analysis of exposure and claim
payment  patterns  by  policyholder category,  as well as  recent settlements, policyholder  bankruptcies,
judicial rulings  and legislative actions.  The Company also  analyzes developing  payment  patterns  among
policyholders  in  the Home  Office  and  Field Office,  and Assumed Reinsurance and Other  categories as
well as  projected  reinsurance  billings  and recoveries.  In addition, the  Company reviews  its historical
gross and  net  loss  and expense paid  experience, year-by-year,  to assess any  emerging  trends,
fluctuations, or characteristics suggested  by the aggregate paid activity.  Conventional  actuarial methods
are not  utilized to  establish asbestos reserves nor have  the  Company’s evaluations resulted  in any  way
of  determining  a meaningful  average  asbestos defense or indemnity payment.

The completion  of  these  reviews and  analyses  in 2016,  2015  and 2014 resulted in  $225  million,
$224 million  and $250 million  increases,  respectively,  in the Company’s  net asbestos  reserves. 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
due to a higher  than  previously  anticipated  level of litigation activity  surrounding  mesothelioma  claims.
This increase in  the estimate  of projected settlement and  defense costs resulted from  payment trends
that  continue to  be higher  than previously  anticipated due  to the  impact of the  current  litigation
environment  discussed above.  Over  the  past decade, the property  and  casualty insurance industry,
including the  Company,  has  experienced net  unfavorable  prior  year  reserve  development with  regard  to
asbestos reserves,  but  the  Company believes that  over that period there  has been a  reduction  in the
volatility associated  with the  Company’s  overall asbestos  exposure  as the  overall asbestos  environment
has evolved  from  one  dominated by  exposure  to  significant  litigation  risks,  particularly coverage
disputes relating  to  policyholders in bankruptcy who  were asserting  that  their claims were not  subject to
the  aggregate limits contained  in  their  policies, to  an environment primarily  driven  by a  frequency of
litigation related  to  individuals  with  mesothelioma. The Company’s  overall view  of  the  current
underlying asbestos  environment is essentially  unchanged  from  recent  periods  and  there remains a  high
degree  of uncertainty with  respect  to  future  exposure to  asbestos  claims.

Net  asbestos  paid  loss and  loss expenses in 2016, 2015 and  2014  were  $708 million, $770 million

and  $242  million, respectively. Net payments  in 2016 included the  payment of  the $518 million
settlement amounts  related  to  PPG  Industries, Inc. Net payments in 2015 included  the  payment  of  the
$502 million  settlement  amounts related  to  the Settlement  of  Asbestos  Direct Action  Litigation  as
described in more detail  in  note 16. Approximately 69%, 69% and  8% of  total  net paid losses in  2016,
2015 and  2014,  respectively,  related to policyholders with  whom the  Company had entered into
settlement agreements limiting  the Company’s liability.

Environmental  Reserves.

In  establishing environmental reserves,  the Company evaluates  the

exposure presented by each policyholder and  the anticipated  cost  of resolution,  if any.  In the  course  of
this  analysis, the  Company generally  considers the probable liability,  available coverage and  relevant
judicial interpretations. In addition, the Company considers  the many variables  presented,  such  as: the
nature  of the alleged  activities of the  policyholder at each  site; the number  of sites;  the total number  of
potentially  responsible parties  at  each  site;  the nature of the  alleged  environmental  harm  and the
corresponding  remedy at each site;  the  nature  of  government enforcement  activities  at  each  site; the
ownership and  general  use of each site;  the overall  nature  of  the  insurance relationship between  the

217

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

Company  and  the policyholder, including  the role of any umbrella or excess insurance the  Company
has issued  to the  policyholder;  the  involvement of other insurers; the  potential  for  other available
coverage,  including  the  number  of years  of coverage; the  role,  if any,  of non-environmental  claims  or
potential non-environmental  claims  in  any  resolution  process;  and  the applicable law in  each
jurisdiction.  The evaluation  of the  exposure presented by  a  policyholder  can  change  as information
concerning that  policyholder  and the  many variables presented  is  developed.  Conventional actuarial
methods are  not  used to estimate  these  reserves.

The Company  continues  to  receive  notices  from  policyholders  tendering claims for the  first time,
frequently under policies  issued prior  to  the mid-1980s. These  policyholders  continue to  present  smaller
exposures, have  fewer  sites and are lower  tier defendants. Further,  in many  instances, clean-up  costs
have  been reduced  because  regulatory  agencies are willing  to  accept  risk-based  site  analyses and more
efficient clean-up  technologies.  Over  the past several years, the  Company has  experienced  generally
favorable trends  in the number  of  new  policyholders tendering  environmental  claims  for  the first  time
and  in the  number of  pending declaratory judgment  actions  relating to environmental matters.
However, the  degree  to  which  those  favorable  trends  have  continued has  been  less  than anticipated.  In
addition,  reserve development  on existing  environmental  claims has  been  greater than  anticipated,
driven by claims  and  legal  developments  in a limited number  of  jurisdictions. As a  result  of  these
factors,  in  2016,  2015  and  2014,  the  Company increased its net  environmental  reserves  by  $82 million,
$72 million and $87  million, respectively.

Asbestos  and  Environmental Reserves. As a result of the processes and procedures  discussed
above,  management believes  that  the  reserves carried  for asbestos  and environmental  claims  are
appropriately established based upon  known facts, current law  and management’s judgment. However,
the  uncertainties surrounding  the  final  resolution of these claims  continue,  and  it  is  difficult to
determine  the  ultimate  exposure  for  asbestos and environmental  claims and related litigation. As a
result, these reserves are subject  to revision  as new information  becomes available and  as  claims
develop.  The  continuing  uncertainties  include, without  limitation,  the risks  and  lack of  predictability
inherent in complex litigation,  any  impact from the bankruptcy protection  sought  by various  asbestos
producers and other asbestos defendants,  a further  increase or decrease  in the  cost to  resolve,  and/or
the  number  of,  asbestos and environmental  claims beyond  that  which is anticipated, the emergence  of  a
greater number  of  asbestos claims  than  anticipated as a  result  of  extended  life expectancies resulting
from  medical  advances  and lifestyle improvements,  the role of any umbrella  or excess  policies  the
Company  has issued,  the resolution or  adjudication of disputes  pertaining to the  amount  of  available
coverage for asbestos  and environmental claims  in a  manner  inconsistent with  the  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

218

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

7.  INSURANCE CLAIM RESERVES  (Continued)

completion and significant legal  questions are resolved or,  failing settlement, until  the dispute  is
adjudicated. This  is particularly the  case  with policyholders  in bankruptcy where  negotiations  often
involve  a large number of  claimants  and  other  parties  and require  court approval  to  be  effective.  As
part  of  its continuing analysis  of asbestos  and  environmental reserves, the Company  continues  to  study
the  implications  of  these and  other  developments.

Because of  the uncertainties set  forth above, additional liabilities  may  arise  for  amounts  in excess

of  the Company’s  current  reserves.  In  addition, the Company’s  estimate  of  claims  and  claim  adjustment
expenses may  change. These  additional  liabilities  or  increases  in estimates, or  a range  of  either,  cannot
now  be  reasonably estimated  and could  result in  income statement charges that  could  be material to
the  Company’s  operating  results  in  future periods.

Catastrophe  Exposure

The Company  has geographic  exposure  to catastrophe losses,  which can  be caused  by  a  variety  of

events, including,  among others,  hurricanes, tornadoes  and  other windstorms, earthquakes, hail,
wildfires,  severe winter  weather,  floods,  tsunamis,  volcanic  eruptions  and other  naturally-occurring
events, such as solar  flares.  Catastrophes  can  also result from terrorist  attacks  and  other  intentionally
destructive  acts including  those  involving nuclear,  biological,  chemical, radiological, cyber-attacks,
explosions and infrastructure failures.  The incidence  and severity  of  catastrophes  are  inherently
unpredictable. The extent  of  losses  from a catastrophe  is  a  function  of  both  the total  amount of insured
exposure in the area affected by  the  event  and the severity of the event.  Most  catastrophes are
restricted to  small geographic areas;  however,  hurricanes  and  earthquakes may  produce significant
damage  in larger areas, especially those  that are heavily populated. The  Company  generally  seeks  to
mitigate  its exposure  to catastrophes  through individual risk  selection  and  the  purchase  of catastrophe
reinsurance.

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;  the potential impact  of  changing climate conditions, including
higher  frequency  and severity  of  weather-related  events;  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 the  Company in  estimating reserves for  that reporting period. The estimates
related  to  catastrophes  are  adjusted  as  actual  claims emerge.

219

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

8.  DEBT

Debt  outstanding was  as  follows:

(at December 31, in millions)

Short-term:
Commercial  paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.75%  Senior  notes due  December  15,  2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25%  Senior  notes due  June  20, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016

2015

$ 100
450
—

$ 100
—
400

Total  short-term debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

550

500

Long-term:
5.75%  Senior  notes due  December  15,  2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.80%  Senior  notes due  May 15, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.90%  Senior  notes due  June  2,  2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.90%  Senior  notes due  November 1,  2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.75%  Senior  notes due  April  15,  2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.625% Junior  subordinated  debentures  due December 15, 2027 . . . . . . . . . . . . . . . .
6.375% Senior  notes due March 15,  2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.75%  Senior  notes due  June  20, 2036 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25%  Senior  notes due  June  15, 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.35%  Senior  notes due  November 1,  2040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.60%  Senior  notes due  August 1,  2043 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.30%  Senior  notes due  August 25, 2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.50%  Junior subordinated  debentures  due  December 15, 2045 . . . . . . . . . . . . . . . . .
3.75%  Senior  notes dues May  15,  2046 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.312% Junior  subordinated  debentures  due July 1, 2046 . . . . . . . . . . . . . . . . . . . . .
6.25%  Fixed-to-floating rate  junior  subordinated  debentures due March 15, 2067 . . . .

—
500
500
500
200
125
500
400
800
750
500
400
56
500
73
107

450
500
500
500
200
125
500
400
800
750
500
400
56
—
73
107

Total  long-term  debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,911

5,861

Total  debt principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized fair value adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt  issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,461
47
(71)

6,361
49
(66)

Total  debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,437

$6,344

2016 Debt  Issuance. On May  11,  2016, the Company issued $500 million aggregate principal

amount  of 3.75%  senior  notes that  will  mature on May 15, 2046. The net proceeds of  the issuance,
after the  deduction of underwriting  and  other expenses, totaled approximately $491 million. Interest  on
the  senior notes is payable semi-annually in arrears  on May 15 and November 15. Prior to
November 15,  2045, the  senior notes  may be redeemed, in whole or in part, at the Company’s option,
at any  time or from  time  to time,  at  a  redemption price equal to the greater of (a) 100% of the
principal amount of  any  senior  notes  to  be redeemed or (b) the sum of the present values  of the
remaining scheduled payments  of  principal and interest  on any senior notes to be redeemed  (exclusive
of  interest  accrued to the  date of  redemption) discounted to the date of redemption on a semi-annual
basis  (assuming a  360-day  year  consisting of twelve 30- day months) at the then current Treasury Rate
(as defined  in the  senior notes), plus  20  basis points. On or after November 15,  2045, the senior notes
may  be  redeemed,  in whole or  in  part,  at the Company’s option, at  any time or from time to time, at  a

220

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

8.  DEBT (Continued)

redemption price  equal to  100%  of  the  principal amount of any  senior notes  to  be redeemed,  plus
accrued and  unpaid interest  to,  but  excluding, the  redemption  date.

2016 Debt Repayment. On June 20, 2016, the Company’s $400 million, 6.25% senior notes

matured  and  were  fully paid.

2015 Debt Issuance. On August 25, 2015, the Company issued $400 million aggregate principal

amount  of 4.30% senior notes  that  will  mature on August 25, 2045. The net proceeds of the issuance,
after original  issuance  discount  and  the  deduction of underwriting  expenses and commissions and other
expenses, totaled approximately  $392  million. Interest  on  the senior  notes is payable semi-annually  in
arrears  on  February  25  and  August  25.  Prior to February 25,  2045, the senior notes may  be redeemed,
in whole or in part,  at the  Company’s  option, at any time or from  time to time, at a redemption price
equal  to  the greater  of  (a) 100% of  the  principal amount  of any senior notes to  be redeemed or (b)  the
sum of  the  present values  of  the  remaining scheduled payments of principal and interest on any senior
notes to be  redeemed  (exclusive  of  interest accrued to  the date of redemption) discounted  to the date
of  redemption  on a  semi-annual basis  (assuming a 360-day year consisting of  twelve 30-day months)  at
the  then  current  Treasury Rate  (as  defined in the senior notes), plus  25 basis  points. On or  after
February 25, 2045, the  senior notes  may  be redeemed, in whole or in  part, at the Company’s option, at
any  time  or  from time  to  time,  at a  redemption  price equal to 100% of the principal amount of any
senior  notes to  be  redeemed.

2015 Debt Repayment. On December 1, 2015, the Company’s $400 million, 5.50% senior notes

matured  and  were  fully paid.

Description  of  Debt

Commercial  Paper—The  Company  maintains an $800 million commercial paper program,
supported by  a $1.0 billion bank  credit  agreement that expires  on June  7,  2018. (See ‘‘Credit
Agreement’’ discussion that  follows.)  Interest  rates on commercial paper  issued  in  2016  ranged from
0.35%  to 0.55%,  and  in 2015  ranged  from 0.09% to 0.30%.

Senior  Notes—The  Company’s  various senior debt issues  are  unsecured  obligations  that  rank

equally with one  another. Interest payments  are  made semi-annually. The  Company  generally  may
redeem some  or all of the  notes prior  to  maturity in  accordance with terms unique to  each  debt
instrument.

Junior Subordinated  Debentures—The Company’s  $107 million remaining  aggregate  principal
amount of 6.25%  fixed-to-floating rate  debentures  bear  interest at an  annual  rate of  6.25% from  the
date  of  issuance  to,  but excluding, March 15,  2017, payable  semi-annually in  arrears on  March  15 and
September  15. From and  including  March 15, 2017, the debentures  will bear interest  at an  annual  rate
equal  to three-month LIBOR plus 2.215%, payable  quarterly  on  March 15,  June  15,  September 15 and
December 15  of each year.  The  Company can  redeem the  debentures at its option, in  whole  or  in  part,
at any time on or  after March 15, 2017  at a redemption price of 100%  of the  principal  amount  being
redeemed plus accrued  but unpaid  interest. The Company can  redeem the  debentures at  its option
prior to March  15,  2017 (a) in  whole  at any time  or  in part from time to  time  or (b)  in whole, but  not
in part,  in  the  event of  certain tax or rating  agency events  relating to  the debentures,  at a  redemption

221

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

8.  DEBT (Continued)

price equal to  the greater  of  100% of  the principal amount being  redeemed and the  applicable
make-whole amount,  in each  case  plus  any  accrued and unpaid  interest.

The Company  has the  right,  on one or more occasions, to defer  the  payment of interest on  the

debentures.  The  Company will  not  be  required  to settle deferred  interest  until it  has deferred  interest
for five consecutive  years or, if earlier,  made a  payment  of  current  interest during  a  deferral period.
The Company  may  defer  interest for  up  to  ten consecutive years  without  giving rise  to an  event  of
default. Deferred  interest  will  accumulate additional  interest at an  annual  rate equal to the  annual
interest  rate then  applicable to the debentures.

The debentures have a  final  maturity date  of  March 15, 2067  and  a scheduled maturity  date of
March  15, 2037. The Company  can  redeem  the debentures at its option  any  time  (as described  above)
using any  source of funds, including cash. If the Company chooses not  to  redeem the  debentures,  then
during  the  180-day  period  ending not  more than 15 and  not  less than ten  business days  prior to the
scheduled  maturity date, the Company  will  be required to  use commercially reasonable efforts to  sell
enough  qualifying capital  securities to  permit repayment of the  debentures at  the scheduled maturity
date. If  any debentures  remain outstanding after the  scheduled maturity  date,  unless  and  until the
Company  redeems  the  debentures  (as  described  above) using  any  source  of  funds,  including  cash,  the
Company  shall be  required  to  use its  commercially reasonable efforts  on a  quarterly  basis  to  raise
sufficient proceeds  from  the sale of  qualifying capital securities to permit the  repayment  in  full of the
debentures.  If  there  are  remaining  debentures at the  final maturity  date, the Company  is required to
redeem the  debentures  using any source  of funds. Qualifying  capital securities  are  securities  (other than
common stock,  qualifying  warrants, mandatorily  convertible  preferred stock,  debt  exchangeable for
common equity,  and  debt  exchangeable  for preferred equity) which  generally are  treated  by  the ratings
agencies  as  having  similar  equity  content to the debentures.

The Company’s  three  other junior subordinated debenture instruments are  all similar  in  nature to

each  other.  Three  separate  business  trusts issued  preferred securities  to investors  and used  the proceeds
to purchase the  Company’s subordinated debentures. Interest  on each  of  the instruments is paid
semi-annually.

The Company’s  consolidated balance sheet includes the debt instruments acquired  in  a business

acquisition,  which were  recorded  at fair  value as  of the acquisition  date.  The  resulting fair  value
adjustment  is being amortized  over the  remaining life of the  respective debt  instruments  using  the
effective-interest method.  The  amortization of the fair  value adjustment reduced  interest expense by
$2 million and  $1 million for  the years  ended  December  31,  2016  and  2015, respectively.

222

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

8.  DEBT (Continued)

The following  table  presents merger-related unamortized fair value  adjustments and  the  related

effective  interest rate:

(in millions)

Subordinated  debentures . . . . . . . . . . . . . . . . . . .

Issue Rate Maturity Date

7.625% Dec. 2027
8.500% Dec. 2045
8.312% Jul. 2046

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unamortized
Fair Value
Purchase
Adjustment  at
December  31,
2015
2016

$14
15
18

$47

$15
15
19

$49

Effective
Interest  Rate
to  Maturity

6.147%
6.362%
6.362%

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. The  guarantees  pertain to the $200 million 7.75% notes due 2026 and
the  $500  million 6.375%  notes  due 2033.

Maturities—The  amount of  debt  obligations, other than commercial  paper, that become  due in
each  of  the  next  five  years is as  follows:  2017, $450 million; 2018, $500 million;  2019, $500 million;
2020,  $500 million;  and 2021,  $0.

Credit  Agreement

The Company is party to  a  five-year, $1.0 billion revolving credit agreement with  a syndicate of

financial institutions that  expires  on June  7, 2018.  Pursuant to the credit agreement covenants, the
Company  must  maintain  a minimum  consolidated  net worth, defined as shareholders’ equity
determined  in  accordance with  GAAP  plus (a)  trust preferred securities (not to exceed 15% of total
capital)  and (b)  mandatorily convertible  securities  (combined with  trust  preferred securities, not  to
exceed 25% of  total capital)  less  goodwill  and other intangible assets, of $13.73 billion. In addition, the
credit  agreement  contains other customary restrictive  covenants as well as certain customary  events  of
default, including  with respect to  a  change  in control, which is defined to include the acquisition of
35%  or more  of the  Company’s  voting  stock  and certain  changes in the composition of the Company’s
board of directors. At December 31,  2016,  the Company was in  compliance with these covenants.
Generally,  the  cost of borrowing under this agreement  will range from LIBOR plus 87.5 basis points  to
LIBOR  plus 150  basis points, depending on the  Company’s credit ratings. At December 31, 2016, that
cost  would have been  LIBOR plus 112.5 basis points, had there been any  amounts outstanding under
the  credit  agreement. This credit agreement also supports the Company’s  commercial paper program.

Shelf Registration

In  June 2016,  the Company filed with  the Securities and  Exchange Commission a universal shelf
registration statement  that expires on June 17, 2019 for  the potential offering and  sale of securities to
replace the Company’s  previous universal  registration  statement that had expired three years after  its
effective  date.  The  Company may offer  these securities from time  to time at prices and on  other terms
to be determined at the time  of offering.

223

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

9.  SHAREHOLDERS’ EQUITY AND  DIVIDEND  AVAILABILITY

Authorized  Shares

The number of  authorized  shares  of the Company  is  1.755 billion,  consisting  of five  million  of
preferred stock,  1.745 billion  shares of  voting common stock and  five  million  undesignated shares. The
Company’s Articles of Incorporation  authorize the Board  of Directors to  establish,  from  the
undesignated shares,  one or more  classes and series  of  shares,  and  to  further  designate the type  of
shares and terms  thereof.

Preferred Stock

The Company’s  Articles of Incorporation provide authority  to  issue  up  to  five million shares  of

preferred  stock.

Common  Stock

The Company  is  governed by the  Minnesota Business Corporation Act.  All  authorized shares of
voting common  stock  have  no  par  value. Shares of common  stock reacquired  are considered  authorized
and  unissued  shares.

Treasury Stock

The Company’s  Board of Directors  has  approved  common share repurchase authorizations under

which repurchases  may be made  from  time  to time in  the open market,  pursuant  to  pre-set trading
plans  meeting  the  requirements  of Rule  10b5-1  under  the  Securities Exchange  Act of  1934,  in  private
transactions or  otherwise. The  authorizations do not have  a  stated  expiration date. The timing  and
actual number  of  shares to  be repurchased  in the future  will depend  on  a variety  of  factors, including
the  Company’s  financial  position, earnings, share price, catastrophe losses, maintaining  capital  levels
commensurate  with the  Company’s  desired ratings  from  independent rating  agencies, funding  of the
Company’s qualified  pension  plan, capital requirements of the  Company’s  operating  subsidiaries,  legal
requirements, regulatory constraints,  other investment opportunities (including  mergers  and acquisitions
and  related financings),  market conditions  and other factors. The  following  table summarizes
repurchase  activity  in  2016  and  remaining  repurchase capacity at December  31,  2016.

(in millions, except per share amounts)
Quarterly Period  Ending

Number of
shares
purchased

Cost of
shares
repurchased

Average  price
paid  per  share

Remaining capacity
under  share  repurchase
authorization

March  31, 2016 . . . . . . . . . . . . . . . . . . . . .
June  30,  2016 . . . . . . . . . . . . . . . . . . . . . .
September  30,  2016 . . . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . .

5.1
4.9
4.7
6.6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

21.3

$ 550
550
550
750

$2,400

$108.46
112.12
117.25
113.54

112.82

$2,784
2,234
1,684
934

934

The Company’s  Amended and Restated 2004 Stock  Incentive Plan  and the  Amended  and Restated

2014 Stock Incentive Plan  provide  settlement  alternatives to  employees in which  the Company  retains
shares to  cover  payroll  withholding taxes in  connection with  the vesting  of restricted  stock unit awards
and  performance  share awards, and to  cover  the price of  certain stock  options that were  exercised.

224

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

9.  SHAREHOLDERS’ EQUITY AND  DIVIDEND  AVAILABILITY  (Continued)

During the years  ended  December 31,  2016 and 2015, the  Company  acquired  $72 million  and
$74 million,  respectively, of its common  stock  under these plans.

Common shares acquired  are reported  as treasury  stock in  the consolidated balance sheet.

Dividend  Availability

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  $3.69  billion is available by the  end  of  2017  for such dividends  to
the  holding  company, TRV,  without  prior approval of the  Connecticut  Insurance  Department.  The
Company  may choose to accelerate the timing within 2017  and/or  increase  the  amount of  dividends
from  its insurance subsidiaries in 2017,  which could result in certain dividends  being  subject  to approval
by  the Connecticut  Insurance  Department.

In  addition  to the  regulatory  restrictions on the  availability of  dividends that  can be  paid  by the

Company’s U.S.  insurance  subsidiaries,  the maximum  amount of dividends that may  be  paid  to  the
Company’s shareholders is  limited,  to  a  lesser degree, by certain  covenants contained in  its line  of
credit  agreement with  a  syndicate  of financial institutions  that require  the Company  to maintain  a
minimum  consolidated  net worth as  described in note 8.

TRV  is not  dependent  on  dividends  or other forms  of  repatriation  from  its foreign operations  to

support its  liquidity needs.  The  undistributed earnings  of  the Company’s  foreign operations  are not
material  and  are intended  to  be permanently reinvested in  those  operations.

TRV  and  its  two  non-insurance  holding  company  subsidiaries  received  dividends  of  $3.05 billion,

$3.75  billion  and $4.10  billion  from  their U.S. insurance subsidiaries  in 2016,  2015  and 2014,
respectively.

For  the years  ended  December  31,  2016, 2015 and  2014, TRV declared  cash  dividends per common

share  of  $2.62, $2.38  and  $2.15,  respectively,  and paid  cash  dividends  of  $757  million,  $739  million  and
$729 million,  respectively.

Statutory  Net  Income  and Statutory  Capital and Surplus

Statutory  net income  of  the Company’s domestic and  international insurance subsidiaries  was

$3.20  billion,  $3.80 billion  and $3.97  billion for the years  ended  December  31, 2016, 2015  and 2014,
respectively. Statutory  capital and surplus  of the  Company’s domestic  and  international insurance
subsidiaries was  $20.76 billion and $20.57 billion at  December  31,  2016  and  2015, respectively.

225

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

10.  OTHER  COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE

INCOME

The following  table  presents the  changes in  the Company’s  accumulated  other comprehensive

income  (AOCI)  for  the  years  ended  December  31, 2016, 2015 and  2014.

Changes in Net Unrealized  Gains on
Investment  Securities
Having No Credit Having Credit Losses

Losses Recognized in
the Consolidated

Recognized  in the
Consolidated

Statement of  Income Statement of Income

Net Benefit Plan
Assets and
Obligations
Recognized in
Shareholders’
Equity

Net
Unrealized
Foreign
Currency Comprehensive
Translation Income (Loss)

Total
Accumulated
Other

(in millions)

Balance, December 31, 2013 . . . .

$1,125

$197

$(431)

$ (81)

$

810

Other comprehensive income

(loss) (OCI) before
reclassifications . . . . . . . . . . .
Amounts reclassified from AOCI .

Net OCI, current period . . . . .

Balance, December 31, 2014 . . . .

OCI before reclassifications . . . .
Amounts reclassified from AOCI .

Net OCI, current period . . . . .

Balance, December 31, 2015 . . . .

OCI before reclassifications . . . .
Amounts reclassified from AOCI .

Net OCI, current period . . . . .

667
(24)

643

1,768

(641)
(27)

(668)

1,100

(530)
(42)

(572)

(2)
3

1

198

(11)
2

(9)

189

4
9

13

(363)
39

(324)

(755)

(18)
60

42

(713)

(30)
40

10

(250)
—

(250)

(331)

(419)
17

(402)

(733)

(49)
—

(49)

52
18

70

880

(1,089)
52

(1,037)

(157)

(605)
7

(598)

Balance, December 31, 2016 . . . .

$ 528

$202

$(703)

$(782)

$ (755)

226

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

10.  OTHER  COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE

INCOME  (Continued)

The following  table  presents the  pre-tax  components  of the Company’s  other comprehensive

income  (loss)  and  the  related income  tax expense  (benefit).

(for the year ended December 31, in  millions)

2016

2015

2014

Changes in net  unrealized  gains  on investment securities:

Having  no  credit  losses  recognized  in  the  consolidated statement of income
Income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(883) $(1,020) $ 976
333
(311)

(352)

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(572)

(668)

643

Having  credit losses  recognized in  the  consolidated statement of income . .
Income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  changes in  benefit plan  assets  and  obligations . . . . . . . . . . . . . . . . . . . .
Income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  changes in  unrealized foreign  currency translation . . . . . . . . . . . . . . . . .
Income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21
8

13

16
6

10

(41)
8

(49)

(14)
(5)

(9)

66
24

42

(461)
(59)

2
1

1

(494)
(170)

(324)

(289)
(39)

(402)

(250)

Total  other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Total  income  tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(887)
(289)

(1,429)
(392)

195
125

Total  other  comprehensive income (loss), net of taxes . . . . . . . . . . . . .

$(598) $(1,037) $ 70

227

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

10.  OTHER  COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE

INCOME  (Continued)

The following  table  presents the  pre-tax  and related  income tax  (expense) benefit  components  of

the  amounts reclassified from  the  Company’s AOCI  to the Company’s  consolidated  statement  of
income.

(for the year ended December 31, in  millions)

2016

2015

2014

Reclassification  adjustments  related to  unrealized  gains on investment securities:

Having  no  credit  losses  recognized  in  the  consolidated statement of income(1) . .
Income  tax expense(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(64) $(42) $(36)
(12)
(15)
(22)

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(42)

(27)

(24)

Having  credit losses  recognized in  the  consolidated  statement of income(1) . . . .
Income  tax benefit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reclassification  adjustment  related  to  benefit plan assets and obligations(3) . . . . .
Income  tax benefit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reclassification  adjustment  related  to  foreign  currency translation(1) . . . . . . . . . .
Income  tax benefit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  income  tax benefit

13
4

9

62
22

40

—
—

—

11
4

2
—

2

93
33

60

26
9

17

79
27

4
1

3

60
21

39

—
—

—

28
10

Total  reclassifications,  net  of  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7

$ 52

$ 18

(1) (Increases)  decreases  net  realized  investment gains  on the consolidated statement of income.

(2) (Increases)  decreases  income tax  expense  on  the consolidated statement of income.

(3) Increases (decreases)  general and  administrative expenses  on the consolidated  statement of

income.

228

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

11.  EARNINGS  PER  SHARE

Basic  earnings  per  share  was computed  by dividing income  available  to common  shareholders  by
the  weighted  average number of  common shares outstanding  during the period. The computation  of
diluted  earnings per  share reflected the  effect of potentially  dilutive  securities.

The following  is a  reconciliation  of the  income and share data  used  in  the  basic and diluted

earnings  per  share computations:

(for the year ended December 31, in  millions, except per share amounts)

2016

2015

2014

Basic  and Diluted
Net  income,  as  reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Participating  share-based  awards—allocated  income . . . . . . . . . . . . . . . . . .

$3,014
(22)

$3,439
(25)

$3,692
(27)

Net  income available to  common  shareholders—basic and diluted . . . . .

$2,992

$3,414

$3,665

Common  Shares
Basic
Weighted average  shares  outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted
Weighted average  shares  outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average  effects of dilutive securities:

288.1

310.6

338.8

288.1

310.6

338.8

Stock  options  and performance  shares . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.9

3.3

3.7

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

291.0

313.9

342.5

Net income  Per Common Share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10.39

$10.99

$10.82

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10.28

$10.88

$10.70

229

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

12.  INCOME  TAXES

The  following  table  presents  the  components  of  income  tax  expense  included  in  the  amounts

reported in the  Company’s consolidated  financial  statements:

(for the year ended December 31, in  millions)

2016

2015

2014

Composition of  income tax  expense  included in the consolidated statement

of income

Current  expense:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 899
21
8

$1,144
29
9

$1,216
28
10

Total  current  tax  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

928

1,182

1,254

Deferred  expense:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  deferred tax  expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  income  tax expense included  in  the consolidated statement of income .
Composition of  income tax  expense  (benefit) included in shareholders’

110
1

111

117
2

119

121
22

143

1,039

1,301

1,397

equity

Expense  (benefit)  relating to  share-based compensation, the changes in

unrealized gain  on  investments,  unrealized  loss on foreign  exchange and
other  items  in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . .

(289)

(448)

68

Total  income  tax expense included  in  the consolidated financial statements . .

$ 750

$ 853

$1,465

The following  is  a reconciliation  of income tax  expense  at the U.S. federal statutory income tax

rate to the income tax expense  reported  in the Company’s  consolidated statement of income:

(for the year ended December 31, in  millions)

2016

2015

2014

Income  before income  taxes
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,946
107

Total  income  before  income  taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,053

$4,621
119

4,740

$4,899
190

5,089

Effective  tax  rate
Statutory  tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expected  federal income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of:

35%

35%

35%

1,419

1,659

1,781

Nontaxable  investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(323)
(57)

(345)
(13)

(379)
(5)

Total  income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,039

$1,301

$1,397

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26%

27%

27%

The Company paid income  taxes of  $892 million, $1.21 billion  and  $1.15 billion during the years
ended  December 31, 2016,  2015 and  2014,  respectively. The current  income  tax payable was  $72 million
and  $50 million  at  December 31,  2016  and 2015, respectively, and was included in other liabilities  in
the  consolidated balance sheet.

230

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

12.  INCOME  TAXES  (Continued)

The net  deferred  tax  asset comprises the  tax effects of temporary  differences related to the

following assets and  liabilities:

(at December 31, in millions)

2016

2015

Deferred  tax assets
Claims and claim  adjustment  expense reserves . . . . . . . . . . . . . . . .
Unearned  premium  reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation-related  liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  gross  deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:  valuation  allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Adjusted gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . .

Deferred  tax liabilities
Deferred  acquisition  costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internally  developed  software . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 664
760
268
272

1,964
3

1,961

604
592
157
143

$ 691
731
326
320

2,068
—

2,068

580
867
134
191

Total  gross  deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . .

1,496

1,772

Net  deferred  tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 465

$ 296

If the Company  determines  that  any  of  its  deferred tax assets will not result in future tax benefits,

a  valuation  allowance must be  established for  the portion of these assets that are not expected to  be
realized.  The  valuation  allowance increased  by $3 million in 2016  relating to the Company’s
consolidated Brazilian  subsidiary.  Based  upon a  review of the Company’s anticipated future taxable
income, and also  including all  other  available evidence, both positive  and  negative, the Company’s
management  concluded  that  it  is  more  likely than not that the net deferred tax assets will be realized.

For  tax  return purposes,  as of  December 31, 2016,  the Company had net operating loss (NOL)

carryforwards  in Brazil  and the  United  Kingdom. The amount and timing of realizing the benefits of
NOL  carryforwards depend  on future  taxable income and  limitations  imposed by tax laws.  Only the
benefits  of the  United Kingdom  NOL  carryforwards have been recognized in the consolidated financial
statements and  are  included  in  net  deferred  tax assets. The NOL amounts by jurisdiction and year  of
expiration  are as follows:

(in millions)

Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount

$
8
$106

Year of
expiration

None
None

U.S. income taxes  have  not been recognized on  $358  million of  the Company’s foreign operations’

undistributed  earnings as of December 31, 2016,  as such earnings are intended to be permanently
reinvested in  those operations. Furthermore, any taxes paid to foreign governments  on these earnings
may be used as  credits  against the U.S.  tax  on any dividend distributions  from such  earnings.

231

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

12.  INCOME  TAXES  (Continued)

The following  is a  reconciliation  of the  beginning and  ending amount  of  unrecognized tax  benefits

for the  years ended  December  31, 2016  and  2015:

(in millions)

2016

2015

$23
Balance  at  January  1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Additions  for tax positions  of  prior years . . . . . . . . . . . . . . . . . . . . . . .
Reductions for  tax positions of prior years . . . . . . . . . . . . . . . . . . . . . .
(9)
Additions  based  on  tax  positions related  to  current  year . . . . . . . . . . . . — —

$16
3
(6)

Balance  at  December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$13

$16

Included  in  the  balances  at December 31, 2016  and 2015 were $7 million and $4 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 $6  million and $12 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, 2016, 2015 and 2014, the Company
recognized approximately  $31  million,  $(32)  million and $31 million in interest, respectively. The
Company  had approximately $57 million and $26 million accrued for the  payment of interest at
December 31, 2016  and 2015, respectively.

The IRS  is  conducting  an  examination of the Company’s U.S. income tax returns for  2013  and
2014.  The  Company  does  not  expect any significant changes to its liability for unrecognized tax benefits
during  the  next  twelve  months.

13.  SHARE-BASED  INCENTIVE  COMPENSATION

The Company has  a share-based  incentive  compensation plan, The Travelers Companies, Inc.
Amended and Restated  2014 Stock Incentive Plan (the 2014 Incentive Plan), the purposes of which  are
to align the interests  of  the  Company’s  non-employee  directors, executive officers and other employees
with those of  the  Company’s  shareholders  and to attract  and  retain personnel by providing incentives  in
the  form of share-based  awards. The  2014 Incentive  Plan permits grants of nonqualified stock options,
incentive stock  options, stock  appreciation rights,  restricted stock, restricted stock units, deferred stock,
deferred  stock  units, performance  awards and other  share-based or share-denominated awards with
respect  to the  Company’s common stock. The  Company has a policy  of issuing new shares to settle the
exercise  of  stock  option  awards and the  vesting  of  other equity awards.

In  connection  with  the adoption  of the 2014  Incentive Plan,  The Travelers  Companies, Inc.

Amended and Restated  2004 Stock Incentive Plan, as amended  (the 2004 Incentive Plan) was
terminated, joining  several  other legacy share-based  incentive  compensation plans that had been
terminated in prior years  (together, the  legacy plans). Outstanding grants  were not  affected by the
termination  of the  legacy plans. The 2014 Incentive Plan is currently the only plan pursuant to which
future stock-based  awards may be granted.

The number  of  shares  of the  Company’s common stock initially authorized for grant under  the
2014 Incentive  Plan  was 10  million shares.  In May 2016, the Company’s shareholders authorized  an

232

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.  SHARE-BASED INCENTIVE  COMPENSATION (Continued)

additional  4.4 million shares  of the Company’s common  stock for  grant under the  2014  Incentive  Plan.
The following  are  not counted towards  the combined  14.4  million  shares available  and will be  available
for future  grants  under  the  2014  Incentive Plan: (i) shares  of  common stock  subject to  awards  that
expire unexercised,  that are forfeited,  terminated or canceled, that  are  settled in  cash  or  other forms  of
property,  or otherwise do  not  result  in  the  issuance of shares  of  common stock,  in  whole  or  in  part;
(ii) shares  that  are used  to pay  the exercise price  of stock  options  and shares  used  to pay  withholding
taxes on awards generally;  and  (iii)  shares purchased by the Company  on the  open  market using  cash
option exercise  proceeds;  provided, however, that the  increase  in  the number  of  shares  of  common
stock  available  for  grant pursuant  to  such market purchases shall  not  be  greater  than the number that
could be repurchased at fair  market  value on  the date of exercise  of  the  stock  option giving rise to such
option proceeds.  In  addition,  the  14.4  million shares authorized  by shareholders  for  issuance under the
2014 Incentive Plan will be increased by any shares subject to  awards under  the  2004  Incentive  Plan
that  were  outstanding as of May  27,  2014 and  subsequently  expire,  are  forfeited, cancelled,  settled  in
cash or otherwise terminate  without  the  issuance  of  shares.

The Company  also  has  a compensation  program  for non-employee directors  (the Director
Compensation  Program).  Under  the  Director  Compensation  Program, non-employee directors’
compensation consists  of an  annual  retainer, a deferred stock  award, committee chair  fees  and  a lead
director  fee.  Each  non-employee director  may choose to receive  all or a portion  of  his  or  her  annual
retainer  in the  form of cash or  deferred  stock units which vest  upon  grant. The annual deferred stock
awards  vest in  full  one  day prior  to  the  date of the Company’s  annual  meeting  of shareholders
occurring in the year  following  the  year  of the  grant date,  subject  to continued service.  The  deferred
stock  awards, including dividend  equivalents, accumulate until  distribution either in  a lump  sum  six
months after termination  of  service as  a  director or, if the director  so elects,  in annual installments
beginning  at least six months  following  termination  of service as  a director.  The  deferred  stock units
issued  under the  Director  Compensation Program  are  awarded  under  the 2014 Incentive Plan.

Stock Option  Awards

Stock  option awards  granted  to  eligible officers and key employees  have a  ten-year  term.  Prior  to

January  1, 2007, stock options  were  granted with an exercise price equal  to the  fair market  value  of the
Company’s common  stock  on  the  day  preceding  the date of  grant. Beginning  January  1, 2007, all  stock
options  are granted  with an  exercise  price equal to the closing  price  of the  Company’s  common  stock
on  the date  of  grant. The stock options  granted generally vest  upon meeting  certain  years of  service
criteria.  Except as the  Compensation  Committee of the board of directors may  allow in  the  future,
stock  options cannot  be sold or  transferred by the participant.  Stock options  outstanding under the
2014 Incentive Plan  and  the 2004 Incentive  Plan generally vest  three years after  grant  date  (cliff  vest).

The fair value  of  each  option  award is estimated  on the date  of  grant  by  application  of  a variation

of  the Black-Scholes  option  pricing  model using the assumptions noted in the  following table. The
expected term  of newly  granted  stock options is the time to vest plus  half the remaining  time  to
expiration. This considers the  vesting restriction and represents an even  pattern of  exercise behavior
over  the remaining term.  The  expected volatility assumption is based on  the  historical  volatility  of the
Company’s common  stock  for the  same period as the estimated  option term based on  the mid-month
of  the option grant.  The expected dividend is based  upon the  Company’s current quarter  dividend
annualized  and  assumed  to  be constant  over  the expected  option term. The risk-free interest  rate for
each  option is the  interpolated market  yield for the mid-month of the option  grant  on a  U.S. Treasury

233

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.  SHARE-BASED INCENTIVE  COMPENSATION (Continued)

bill  with  a  term  comparable  to  the  expected  option term of the granted  stock option.  The  following
table  provides  information about options granted:

(for the year ended December 31,)

2016

2015

2014

Assumptions  used  in estimating fair  value of options on

grant  date

Expected  term  of  stock  options . . . . . . . . . . . . . . . . . . .
Expected  volatility  of  Company’s stock . . . . . . . . . . . . . .
Weighted average  volatility . . . . . . . . . . . . . . . . . . . . . .
Expected  annual  dividend per share . . . . . . . . . . . . . . . .
Risk-free  rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional  information
Weighted average  grant-date fair  value  of options

5 - 6 years

6  years
6 years
15.14% - 16.80% 19.29% 27.2% - 27.5%
27.5%
16.79% 19.29%
$2.20
$2.00 - $2.20
1.31% 1.81% - 1.82%

$2.44 - $2.68
1.36% - 2.23%

granted (per share) . . . . . . . . . . . . . . . . . . . . . . . . . .

$13.29

$15.78

Total  intrinsic  value of  options exercised during  the year

(in  millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$167

$120

$17.22

$117

A  summary  of  stock option  activity  under  the 2014 Incentive Plan and the legacy plans as of  and

for the  year ended  December 31,  2016  is as follows:

Stock Options

Outstanding,  beginning  of  year . . . . . . . . . . .
Original  grants . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited  or  expired . . . . . . . . . . . . . . . . . .

Weighted
Average
Exercise
Price

$ 74.48
106.21
69.13
97.44

Number

9,864,255
2,847,398
(4,069,532)
(82,085)

Weighted
Average
Contractual
Life
Remaining

Aggregate
Intrinsic
Value
($ in millions)

Outstanding,  end  of  year . . . . . . . . . . . . . . .

8,560,036

$ 87.36

6.8 years

Vested  at  end of year(1) . . . . . . . . . . . . . . .

5,588,061

$ 80.74

6.0 years

Exercisable at  end of  year . . . . . . . . . . . . . .

3,007,663

$ 65.18

4.2 years

$300

$233

$172

(1) Represents awards  for  which the requisite service has been rendered, including  those  that are

retirement  eligible.

On February 9,  2017,  the  Company, under  the 2014 Incentive Plan, granted 2,106,022 stock option

awards  with  an  exercise  price of $118.78  per share.  The  fair value attributable to the stock  option
awards  on the  date of grant was  $16.15 per share.

Restricted Stock  Units, Deferred Stock  Units  and Performance Share Award Programs

The Company issues restricted  stock unit awards to eligible officers and key employees under  the

Equity Awards  program established pursuant to the 2014 Incentive  Plan. A restricted stock unit
represents the right  to receive  a share  of  common stock. These restricted stock unit  awards are granted
at market  price,  generally  vest three  years from the date of grant, do not have voting rights and  the

234

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.  SHARE-BASED INCENTIVE  COMPENSATION (Continued)

underlying shares of  common  stock  are  not  issued until the vesting  criteria  is satisfied. In  addition,  the
Company’s board  of directors  can  be  issued deferred stock units  from  (i) an  annual  award;  (ii) deferred
compensation (in lieu of cash retainer);  and (iii) dividend  equivalents earned on  outstanding deferred
compensation.

The Company  also  has  a Performance Share Awards Program  established pursuant to  the 2004

Incentive Plan  and which continues  pursuant  to  the 2014  Incentive Plan.  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  share 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  and the  recipient  meeting  certain  years of  service  criteria.  The
performance  goals  for performance  share awards  are based on the  Company’s  adjusted return  on equity
over  a  three-year  performance  period.  Vesting  of performance  shares is contingent  upon the  Company
attaining the  relevant  performance  period  minimum threshold return on  equity  and  the recipient
meeting  certain years  of service criteria,  generally three years for  full  vesting,  subject to proration  for
certain  termination  conditions.  If the  performance  period  return  on  equity is below  the  minimum
threshold,  none  of  the  performance  shares  will vest. If performance  meets  or exceeds  the  minimum
performance  threshold,  a range  of performance  shares will vest  (50% to  150%  for awards granted  in
2015,  2016 and  2017),  depending  on  the  actual return on  equity  attained.

The fair  value  of  restricted stock  units,  deferred  stock units and  performance  shares  is measured  at

the  market price of  the Company  stock  at date of grant. Under terms  of  the 2014 Incentive Plan,
holders  of  deferred stock  units  and performance shares may receive dividend  equivalents.

The total  fair  value  of shares that vested during the  years ended December  31,  2016, 2015 and

2014 was $175  million,  $179  million  and  $147 million, respectively.

A  summary  of restricted  stock units, deferred stock units and  performance share  activity under the
2014 Incentive  Plan  and  the legacy  plans as  of  and for  the year ended  December 31, 2016 is as  follows:

Restricted and Deferred Stock
Units

Performance Shares

Other Equity Instruments

Number

Weighted Average
Grant-Date
Fair Value

Nonvested,  beginning  of  year . . . . . . . . . . . . 1,435,958
676,736
(667,650)(1)
(68,552)
—

Granted . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . .
Performance-based adjustment . . . . . . . . .

Nonvested, end  of year . . . . . . . . . . . . . . . . 1,376,492

$ 88.35
106.93
86.85
97.82
—

$ 97.75

Number

1,101,989
476,411
(818,360)(2)
(63,495)
100,073(3)

796,618

Weighted  Average
Grant-Date
Fair Value

$ 91.27
106.03
84.43
100.02
88.22

$106.03

(1) Represents awards  for  which the  requisite service  has been rendered.

(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.

(3) Represents the  current  year change  in  estimated performance shares to reflect the attainment  of
performance goals for  the awards  that  were granted  in each  of the years 2014 through 2016.

235

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

13.  SHARE-BASED INCENTIVE  COMPENSATION (Continued)

In  addition  to the  nonvested  shares  presented in  the above table,  there  are related nonvested

dividend equivalent  shares. The number  of nonvested dividend  equivalent shares  related  to deferred
stock  units was  396 at  the beginning  of  the  year  and 408 at  the  end  of  the  year  and  the number  of
nonvested dividend equivalent  shares  related to performance  shares was 40,663  at the beginning of  the
year and 28,480 at the  end  of  the  year.  The  dividend  equivalent shares  are subject to  the same vesting
terms as the  deferred stock  units  and  performance shares.

On February 9, 2017, the  Company, under  the 2014 Incentive Plan, granted  960,515  common stock

awards  in  the  form  of  restricted stock  units, deferred stock  units  and  performance share awards to
participating  officers,  non-employee  directors and  other key  employees.  The restricted stock  units  and
deferred  stock  units  totaled  567,006  shares  while  the  performance  share  awards  totaled  393,509  shares.
The fair  value  per  share attributable  to  the  common stock  awards on  the date of grant  was  $118.78.

Share-Based Compensation  Cost Recognition

The amount  of compensation  cost  for  awards subject  to  a service  condition is based on  the number

of  shares  expected to  be issued and  is  recognized over the  time  period for  which  service  is  to  be
provided  (requisite  service  period).  Awards  granted  to retiree-eligible  employees or to  employees  who
become retiree-eligible  before  an award’s vesting  date are  considered  to  have  met the requisite  service
condition. The  compensation cost  for  awards subject to a  performance condition  is based upon the
probable outcome of  the performance  condition, which on  the  grant date  reflects  an estimate of
attaining 100%  of  the performance shares  granted.  The compensation cost  reflects an  estimated annual
forfeiture rate  from  3.0% to  4.0% over  the requisite service period of the  awards.  That estimate  is
revised if  subsequent  information indicates  that the  actual  number  of  instruments  expected  to  vest  is
likely  to differ  from  previous  estimates.  Compensation  costs for  awards are recognized  on a
straight-line  basis  over the  requisite  service period. For awards  that have graded  vesting  terms,  the
compensation cost is recognized on  a  straight-line basis over the requisite  service  period  for each
separate  vesting  portion  of the  award  as  if  the award  was,  in substance,  multiple  awards. The total
compensation cost for  all  share-based  incentive compensation  awards recognized in  earnings  for  the
years  ended December  31, 2016,  2015  and  2014  was $155  million,  $141  million and $138 million,
respectively.  Included in these amounts  are compensation  cost adjustments of  $11  million,  $8  million
and  $14 million,  for  the  years  ended  December 31, 2016, 2015 and 2014,  respectively, that  reflected  the
cost  associated  with the  updated  estimate of  performance  shares  due to attaining certain performance
levels from the  date  of the  initial grant  of the  performance awards.  The  related  tax  benefits recognized
in earnings were  $52  million,  $47 million and  $47 million for  the years  ended December  31,  2016, 2015
and  2014, respectively.

At December  31,  2016,  there was  $124 million of total unrecognized  compensation  cost  related to

all nonvested share-based incentive  compensation awards.  This includes  stock options,  restricted  and
deferred  stock units and  performance  shares  granted  under  the 2014 Incentive Plan  and  the 2004
Incentive Plan. The  unrecognized compensation cost is expected  to  be  recognized  over a  weighted-
average  period of  1.7  years.  Cash  received  from  the exercise of employee stock  options  under share-
based  compensation plans totaled $332  million and  $183  million  in 2016  and 2015,  respectively. The  tax
benefit for  tax deductions from employee stock options exercised  during  2016  and 2015 totaled
$58 million and $41  million, respectively.

236

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS

The Company  sponsors  a  qualified  non-contributory  defined  benefit  pension plan (the  qualified
domestic 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  covers  certain highly-compensated  employees,  pension  plans  for
employees  of  its foreign  subsidiaries,  and a postretirement health and  life  insurance benefit  plan  for
employees  satisfying  certain age and  service requirements  and  for certain  retirees.

237

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

Obligations  and Funded  Status

The following  tables  summarize the  funded  status,  obligations  and  amounts recognized  in  the

consolidated  balance sheet  for  the Company’s benefit plans.  The Company  uses  a  December  31
measurement  date  for its pension  and  postretirement  benefit plans.

(at and for the year ended December 31,  in millions)

Change  in  projected  benefit  obligation:
Benefit obligation  at  beginning  of  year . . . . . . . . .
Benefits  earned . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  cost  on  benefit  obligation . . . . . . . . . . . . .
Actuarial  loss  (gain) . . . . . . . . . . . . . . . . . . . . . . .
Benefits  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . .

Qualified
Domestic
Pension Plan

2016

2015

Nonqualified
and Foreign
Pension  Plans
2015
2016

Total

2016

2015

$3,250
111
114
54
(162)
—
—

$3,385
124
135
(203)
(191)
—
—

$ 228
7
8
15
(15)
(3)
(15)

$ 227
7
9
2
(8)
—
(9)

$3,478
118
122
69
(177)
(3)
(15)

$3,612
131
144
(201)
(199)
—
(9)

Benefit obligation  at  end  of  year . . . . . . . . . . . .

$3,367

$3,250

$ 225

$ 228

$3,592

$3,478

Change  in  plan  assets:
Fair value of plan  assets  at beginning  of  year . . . . .
Actual  return on  plan  assets . . . . . . . . . . . . . . . . .
Company  contributions . . . . . . . . . . . . . . . . . . . . .
Benefits  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . .

$3,127
222
200
(162)
—
—

$3,235
(17)
100
(191)
—
—

$ 115
11
14
(15)
(3)
(16)

$ 122
3
7
(8)
—
(9)

$3,242
233
214
(177)
(3)
(16)

$3,357
(14)
107
(199)
—
(9)

Fair value of plan  assets  at end  of  year . . . . . . . . .

3,387

3,127

106

115

3,493

3,242

Funded status of  plan  at  end  of year . . . . . . . . . . .

$

20

$ (123) $(119) $(113) $ (99) $ (236)

Amounts recognized  in the  consolidated  balance

sheet  consist  of:

Accrued over-funded  benefit  plan  assets . . . . . . . .
Accrued under-funded benefit  plan  liabilities . . . . .

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

$

20
—

20

$ — $
(123)

5
(124)

$

4
(117)

$

25
(124)

$

4
(240)

$ (123) $(119) $(113) $ (99) $ (236)

Amounts recognized  in accumulated other

comprehensive  income consist  of:

Net  actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . .
Prior  service  benefit . . . . . . . . . . . . . . . . . . . . . . .

$1,072
(6)

$1,079
(8)

$ 55
—

$ 52
—

$1,127
(6)

$1,131
(8)

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,066

$1,071

$ 55

$ 52

$1,121

$1,123

238

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

(at and for the year ended December 31,  in millions)

Change  in  projected  benefit  obligation:
Benefit obligation  at  beginning  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits  earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  cost  on  benefit  obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial  gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan  amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Postretirement
Benefit Plans
2015
2016

$ 233
—
8
(17)
(11)
—
1

$ 255
—
10
(3)
(13)
(11)
(5)

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 214

$ 233

Change  in  plan  assets:
Fair value of plan  assets  at beginning  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual  return on  plan  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company  contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits  paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 15
—
10
(11)

$ 16
—
12
(13)

Fair value of plan  assets  at end  of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

15

Funded status of  plan  at  end  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(200) $(218)

Amounts recognized  in the  consolidated  balance sheet consist of:

Accrued under-funded  benefit  plan  liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(200) $(218)

Amounts recognized  in accumulated other comprehensive income consist of:

Net  actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior  service  benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (13) $
(31)

4
(35)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (44) $ (31)

The total accumulated benefit obligation for the  Company’s  defined benefit pension plans was
$3.48  billion  and  $3.37 billion  at December  31,  2016  and 2015, respectively. The qualified  domestic
pension  plan  accounted  for  $3.26  billion  and $3.15 billion of the  total accumulated benefit obligation at
December 31, 2016  and 2015, respectively, whereas  the nonqualified and foreign plans accounted for
$0.22  billion  of the  total accumulated  benefit obligation at both December 31, 2016 and 2015.

For  pension plans with an accumulated benefit obligation in excess of plan assets, the  aggregate

projected  benefit obligation was  $0.2 billion and  $3.47 billion at  December 31, 2016 and 2015,
respectively,  and  the aggregate accumulated benefit  obligation  was $0.2 billion and $3.36 billion at
December 31, 2016  and 2015, respectively. The fair  value of plan assets for the above plans was
$0.1  billion and  $3.23  billion  at  December 31, 2016 and  2015, respectively.

The Company has  discretion regarding whether  to provide additional funding and when to provide

such funding to its  qualified domestic pension plan. In 2016, 2015 and 2014, there were no required
contributions  to the  qualified domestic  pension  plan. In 2016, 2015 and 2014, the Company voluntarily
made contributions totaling $200 million, $100 million  and $200 million, respectively, to the qualified
domestic pension  plan.  There  is  no required contribution to the qualified domestic pension plan  during
2017,  and the  Company  has  not determined  whether or not additional funding will be made during
2017.  With respect  to  the Company’s foreign pension  plans, there are no significant required
contributions  in 2017.

239

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

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 year ended December 31, in  millions)

Net Periodic Benefit Cost:
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  cost  on  benefit  obligation . . . . . . . . . . . . . . . . . .
Expected  return on plan  assets . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization  of  unrecognized:

Pension Plans
2015

2014

2016

Postretirement
Benefit  Plans
2015

2016

2014

$ 118
122
(230)
—
1

$ 131
144
(230)
—
—

$ 110
8
150
(218) —
(1) —
—
2

$ — $ — $—
10
10
— —
— —
— —

Prior  service benefit . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  actuarial loss  (gain) . . . . . . . . . . . . . . . . . . . . . . . .

(1)
66

(1)
96

—
65

(3)
—

(3)
1

(2)
(3)

Net  periodic  benefit  cost . . . . . . . . . . . . . . . . . . . . . .

$ 76

$ 140

$ 108

$ 5

$ 8

$ 5

Other  Changes  in Benefit Plan  Assets  and  Benefit
Obligations  Recognized  in Other  Comprehensive
Income:

. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior  service  benefit
Net  actuarial loss  (gain) . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate change . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization  of  prior  service benefit . . . . . . . . . . . . . . . .
Amortization  of  net actuarial  gain (loss) . . . . . . . . . . . . . .

Total  other changes recognized  in other

$ — $ — $

66
(2)
—
(1)
1
(66)

43
—
—
—
1
(96)

(8) $ — $(11) $—
(3)
50
— —
— —
— —
2
3
3
(1)

(17)
516
—
1
(2) —
(2) —
—
3
(65) —

comprehensive  income . . . . . . . . . . . . . . . . . . . . .

(2)

(52)

439

(13)

(12)

55

Total  other changes recognized  in net periodic  benefit
cost  and  other comprehensive income . . . . . . . . . .

$ 74

$ 88

$ 547

$ (8) $ (4) $60

In  2016,  the  Company  began using  a full yield-curve approach  in the estimation of the service and

interest  cost  components of net periodic  benefit costs for  its qualified and nonqualified domestic
pension  plans and  its  domestic postretirement  benefit plans. The full yield curve  approach applies the
specific  spot rates  along  the  yield  curve  that the  Company used to determine its projected benefit
obligation at the  beginning  of the  year  to  the projected cash flows related to service and interest costs.
Previously, the Company  estimated  these service  and interest cost components  by applying a single
weighted-average discount  rate  derived from this yield curve. This change was made to provide a better
estimate  of  the  service  and interest cost components of net periodic benefit costs, consistent with the
methodology used to  estimate  the projected  benefit  obligation for each of the benefit  plans.

This change did  not affect the measurement of the Company’s total benefit obligations as the
change in the service cost  and interest cost is completely offset in  the actuarial (gain) loss reported  for
the  period.  The  change  reduced the  service  and  interest cost  components of net periodic benefit  costs

240

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

for 2016  by  $6  million and $30  million,  respectively,  and  resulted in  an  $0.08 increase in  diluted net
income  per  share  for  2016.  The  weighted average  discount  rates that  were  used to measure  service  and
interest  costs  during  2016 were 4.77%  and 3.64%,  respectively, for  the domestic qualified pension plan,
4.53%  and  3.47%,  respectively,  for  the  domestic  nonqualified pension plan  and  0.00% and 3.53%,
respectively,  for  the  domestic postretirement  benefit plan.  The  discount  rate associated with the  service
cost  component  of the  domestic  postretirement benefit plan is zero as  it is  a closed plan and all
participants are fully vested.  Under  the  Company’s prior  estimation  approach,  the weighted  average
discount  rate  for  both  the  service  and  interest cost components  would  have  been  4.50% for the
domestic qualified  pension  plan,  4.37%  for  the domestic nonqualified  pension  plan and 4.35%  for the
domestic postretirement  benefit  plan.  The Company accounted for  this change  as  a change  in estimate,
and  accordingly, recognized  the  effect  prospectively beginning in  2016.

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  $75 million  and the  estimated prior  service  benefit  to  be
amortized over the  next  fiscal year  is  $1  million. For the  postretirement  benefit plans,  the estimated net
actuarial gain 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  benefit  to be  amortized over the  next  fiscal year is  $3  million.

241

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

Assumptions  and  Health  Care Cost Trend  Rate Sensitivity

The following  table  summarizes  assumptions  used  with regard to the Company’s qualified  and

nonqualified  domestic pension plans and  the domestic postretirement benefit plans.

(at and for the year ended December 31,)

2016

2015

Assumptions  used  to  determine  benefit obligations
Discount  rate:

Qualified  domestic pension  plan . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonqualified  domestic pension plan . . . . . . . . . . . . . . . . . . . . . . . .
Domestic  postretirement  benefit  plan . . . . . . . . . . . . . . . . . . . . . . .
Future  compensation  increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.23% 4.50%
4.15% 4.37%
4.10% 4.35%
4.00% 4.00%

Assumptions  used  to  determine  net periodic benefit cost
Discount  rate:

Qualified  domestic pension  plan:

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  cost

4.77% 4.10%
3.64% 4.10%

Nonqualified  domestic pension  plan:

Service  cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest  cost

4.53% 4.10%
3.47% 4.10%

Domestic  postretirement  benefit  plan:

Interest  cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.53% 4.10%

Expected  long-term  rate of return on assets:

Pension plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement  benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7.00% 7.25%
4.00% 4.00%

Assumed  health  care  cost  trend rates
Following year:

Medical  (before age  65) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical (age  65 and older) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.50% 6.75%
7.25% 7.50%

Rate to  which the  cost trend rate is assumed  to  decline (ultimate trend
rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.00% 5.00%

Year that  the rate  reaches the ultimate trend rate:

Medical  (before age  65) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical (age  65 and older) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2022
2025

2022
2025

The discount  rate assumption  used  to determine the benefit obligation is based on a yield-curve
approach. Under this  approach, individual spot rates  from the yield curve  of a hypothetical portfolio  of
high  quality  fixed maturity corporate  bonds  (rated  Aa)  available at the  year-end valuation date, for
which the timing  and  amount of  cash  outflows correspond with the timing and amount of the  estimated
benefit payouts of  the Company’s benefit  plan, are applied to expected future benefits payments in
measuring  the  projected benefit obligation. The discount rate assumption used to determine benefit
obligations disclosed  above  represents  the  weighted average  of  the individual spot rates.

242

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

The discount rate  assumption  used  to  determine the net periodic benefit cost is the single weighted

average  discount  rate  derived  from  the  yield  curve used to measure the benefit obligation at the
beginning  of  the year.

In  choosing the  expected  long-term  rate of return on  plan assets, the Company selected the rate

that  was  set as the  return objective by  the Company’s Benefit Plans Investment Committee,  which  had
considered the  historical  returns  of equity  and fixed  maturity markets in  conjunction with  prevailing
economic and financial market  conditions.

As an indicator of sensitivity, increasing the assumed  health care cost trend  rate  by 1% would  have

increased  the  accumulated postretirement benefit  obligation by $20 million at December 31,  2016,  and
the  aggregate of the  service  and interest  cost components of net postretirement benefit expense by
$1 million for the year ended December 31, 2016.  Decreasing the assumed health  care cost trend rate
by  1%  would  have decreased  the accumulated  postretirement benefit obligation at December 31, 2016
by  $17  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, 2016.

The assumptions  made for the  Company’s foreign pension and foreign postretirement benefit plans

are not  materially  different  from those  of  the Company’s  qualified  domestic pension plan  and the
domestic postretirement  benefit  plan.

Plan Assets

The qualified domestic pension  plan assets  are  invested for the exclusive benefit of the plan
participants and  beneficiaries and  are  intended, over time, to satisfy the benefit obligations under the
plan. Risk  tolerance  is  established  through consideration  of plan liabilities, plan funded status and
corporate financial  position. The  asset  mix guidelines  have  been established and are reviewed quarterly.
These  guidelines  are intended  to  serve  as tools to facilitate the investment of plan assets to maximize
long-term total  return and  the  ongoing  oversight of the plan’s investment  performance. Investment risk
is measured  and  monitored on  an ongoing basis through daily and monthly  investment portfolio
reviews, annual  liability  measurements  and  periodic asset/liability studies.

The Company’s  overall  investment  strategy  for the  qualified domestic pension plan 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 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.

Assets  of  the Company’s foreign pension plans  are  not  significant.

243

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

Fair  Value Measurement—Pension  Plans  and Other Postretirement Benefit  Assets

For  a  discussion  of the  methods employed by  the Company to  measure  the fair  value  of  invested

assets, see  note 4.  The  following  discussion of fair value measurements applies exclusively  to the
Company’s pension plans and other  postretirement benefit  assets.

Fair value  estimates  for equity  and bond mutual funds held  by the  pension  plans  reflect  prices
received from  an external  pricing  service that are based on  observable  market transactions. These
estimates  are included  in  Level  1.

Short-term  securities are  carried  at fair value  which approximates cost plus  accrued interest  or
amortized discount. The  fair  value  or  market value of these is periodically compared  to  this amortized
cost  and  is based  on  significant  observable inputs  as determined by  an  external  pricing  service.
Accordingly,  the estimates of fair value  for  such short-term securities, other  than U.S.  Treasury
securities and  money market  mutual  funds,  provided by  an  external  pricing service are  included  in the
amount disclosed  in Level  2  of  the  hierarchy.  The estimated fair  value of  U.S. Treasury  securities  and
money  market mutual  funds is included  in  the amount disclosed  in Level  1  as the estimates are  based
on  unadjusted market  prices.

244

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

Fair  Value  Hierarchy—Pension  Plans

The following  tables  present  the  level within the fair  value  hierarchy at which  the financial  assets

of  the Company’s  pension plans are  measured on a recurring  basis.

(at December 31, 2016, in millions)

Total

Level 1

Level 2

Level 3

Invested  assets:
Fixed  maturities

Obligations  of states,  municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities  issued  by foreign  governments . .
Mortgage-backed  securities,  collateralized
mortgage  obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other  corporate  bonds . . . . . . . . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . . . . . . .

Mutual funds

Equity mutual  funds . . . . . . . . . . . . . . . . . . . .
Bond  mutual funds . . . . . . . . . . . . . . . . . . . . .

Total  mutual  funds . . . . . . . . . . . . . . . . . . . .

Equity  securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other investments(1) . . . . . . . . . . . . . . . . . . . . .

Cash  and short-term  securities

U.S.  Treasury securities . . . . . . . . . . . . . . . . . .
Money market  mutual funds . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  cash  and short-term securities . . . . . .

$

9
14

$ — $
—

9
14

$—
—

12
511

546

1,285
641

1,926

747

1

45
20
208

273

—
12
— 511

— 546

1,278
638

1,916

747

—

45
19
28

92

7
3

10

—

—

—
1
180

181

—
—

—

—
—

—

—

1

—
—
—

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,493

$2,755

$737

$ 1

(1) The  fair  value  estimates of the 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.

245

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

The balance  of  Level  3  fair value investments  was $1 million  at December  31,  2016  and  the change

in balance  from  the  prior year  was  insignificant.

(at December 31, 2015, in millions)

Total

Level 1

Level 2

Level 3

Invested  assets:
Fixed  maturities

Obligations  of states,  municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . .
Debt  securities  issued  by foreign governments . .
Mortgage-backed  securities,  collateralized
mortgage  obligations and pass-through
securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
All  other corporate bonds . . . . . . . . . . . . . . . .

Total  fixed maturities . . . . . . . . . . . . . . . . .

Mutual  funds

Equity  mutual  funds . . . . . . . . . . . . . . . . . . . .
Bond  mutual funds . . . . . . . . . . . . . . . . . . . . .

Total  mutual  funds . . . . . . . . . . . . . . . . . . . .

Equity  securities . . . . . . . . . . . . . . . . . . . . . . . . .

Other  investments(1) . . . . . . . . . . . . . . . . . . . . .

Cash  and  short-term  securities

U.S.  Treasury  securities . . . . . . . . . . . . . . . . . .
Money market  mutual funds . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total  cash  and short-term securities . . . . . .

$

17
16

$ — $ 17
16

—

$—
—

16
491

540

1,237
649

1,886

625

2

25
23
141

189

16
—
— 491

— 540

1,231
646

1,877

624

—

25
19
20

64

6
3

9

1

—

—
4
121

125

—
—

—

—
—

—

—

2

—
—
—

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,242

$2,565

$675

$ 2

(1) The  fair  value  estimates of the 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 balance  of Level 3 fair  value investments was $2 million at December 31, 2015 and the change

in balance  from  the prior  year  was insignificant.

246

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

14.  PENSION PLANS, RETIREMENT  BENEFITS  AND SAVINGS PLANS (Continued)

Other  Postretirement  Benefit Plans

The Company’s  overall investment  strategy is to  achieve a mix  of  approximately  35%  to  65%  of

investments for  long-term  growth and  35% to 60% for near-term insurance  payments  with  a wide
diversification of  asset types,  fund  strategies and fund  managers. The  current target allocations  for  plan
assets  are  25% to 75%  fixed  income  securities, with  the remainder allocated to  short-term securities.
Fixed  income securities  include  corporate bonds  of  companies  from  diversified industries,  mortgage-
backed securities  and  U.S.  Treasuries.

Fair  Value—Other  Postretirement Benefit  Plans

The Company’s  other  postretirement benefit plans  had financial assets  of  $14 million  and

$15 million at December 31, 2016 and 2015, respectively, which  are  measured at  fair value on  a
recurring  basis.  The  assets  are primarily  corporate bonds and  short-term securities and categorized  as
level 2  in  the  fair value hierarchy.

Estimated Future  Benefit  Payments

The following  table  presents the  estimated benefits  expected to  be paid  by the  Company’s  pension
and  postretirement benefit  plans  for  the  next ten years (reflecting  estimated  future  employee  service).

(in millions)

Benefits Expected to be  Paid

Pension  Plans

Postretirement
Benefit Plans

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022  through 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 230
240
247
253
258
1,327

$13
14
14
14
14
71

Savings Plan

The Company has  a savings  plan,  The Travelers 401(k) Savings Plan  (the Savings Plan), in which

substantially all U.S. domestic  Company  employees are eligible to participate. Under the Savings Plan,
the  Company  matches employee  contributions up to 5% of eligible pay,  with a maximum annual match
of  $6,000  which  becomes  100% vested  after three years of service. The Company’s matching
contribution is made  in cash and invested according to the employee’s  current investment elections and
can be  reinvested into  other investment  options in accordance with the terms of the plan. The
Company’s non-U.S. employees participate  in separate savings plans. The total expense related to  all of
the  savings  plans  was  $114  million, $109  million and $103 million for the  years ended December 31,
2016,  2015 and 2014, respectively.

All  common shares  held  by  the Savings Plan are considered outstanding for basic and  diluted EPS

computations  and dividends  paid  on  all  shares are charged to retained earnings.

247

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

15.  LEASES

Rent expense was  $197 million,  $202 million  and $215 million in  2016, 2015 and 2014, respectively.

Future  minimum  annual  rental  payments  under  noncancellable  operating  leases  for 2017, 2018,

2019,  2020 and  2021 are $147 million,  $118 million,  $100  million,  $80 million  and $60  million,
respectively,  and $100  million  for  2022  and  thereafter.  Future sublease  rental  income  aggregating
approximately  $4  million  will  partially  offset these commitments.

16.  CONTINGENCIES, COMMITMENTS AND GUARANTEES

Contingencies

The major  pending  legal  proceedings, other than  ordinary  routine litigation incidental to  the
business,  to which  the Company  or any  of its subsidiaries is a party  or  to  which any  of  the Company’s
properties is subject  are described below.

Asbestos  and  Environmental  Claims  and  Litigation

In  the ordinary course  of its insurance business,  the Company has  received and continues to
receive claims  for insurance  arising under policies issued by  the  Company asserting  alleged injuries  and
damages  from asbestos-  and  environmental-related exposures that are the  subject  of related coverage
litigation.  The  Company  is defending  asbestos- and environmental-related  litigation  vigorously  and
believes  that it has  meritorious  defenses; however, the  outcomes of these disputes are  uncertain. In  this
regard,  the  Company  employs  dedicated  specialists and  aggressive  resolution  strategies  to manage
asbestos and environmental loss  exposure, including  settling litigation under  appropriate circumstances.
Currently, it  is  not  possible  to predict  legal outcomes  and their impact  on the  future  development of
claims  and litigation  relating to  asbestos  and environmental  claims.  Any  such development  will  be
affected by  future court  decisions and  interpretations, as well  as changes  in applicable  legislation.
Because of these  uncertainties, additional  liabilities may arise  for amounts  in excess  of the  Company’s
current insurance  reserves.  In  addition,  the Company’s estimate  of  ultimate  claims  and  claim
adjustment  expenses  may  change.  These  additional liabilities  or  increases  in  estimates,  or a  range of
either,  cannot now  be  reasonably  estimated and could  result in income statement  charges that  could  be
material  to the Company’s  results  of  operations  in future periods.

Settlement of Asbestos  Direct Action  Litigation

In  2001 and  2002,  a  number of lawsuits, including two purported  class  action  suits, were filed
against certain  subsidiaries of the Company (collectively  or  individually, Travelers)  and  other  insurers  in
state courts in  West Virginia,  Massachusetts  and Hawaii. The  plaintiffs alleged  that  the  insurer
defendants had  inappropriately handled  and settled  asbestos  claims in  violation of  those states’ statutes
regulating  insurance  claims  handling and/or those states’ common law.  In all  these  suits,  the plaintiffs
sought to reopen large numbers of  settled asbestos claims  and  to impose liability  for  damages,  including
punitive  damages,  directly on insurers. These suits  are  collectively  referred  to  as the Statutory Actions.

Plaintiffs  also filed  complaints  during 2001 and 2002 in State Courts  in West  Virginia,  Texas  and

Ohio,  and occasionally  in other jurisdictions, against  Travelers  and other insurers, alleging  that  the
insurers breached alleged  duties to individuals  allegedly  exposed to  asbestos  products.  The  plaintiffs
sought damages for  personal injuries and wrongful death, including punitive  damages.  These suits  are
collectively referred to  as  the Common Law  Actions.

248

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

16.  CONTINGENCIES, COMMITMENTS AND GUARANTEES  (Continued)

In  response  to  these  claims,  Travelers moved to  enjoin the  Statutory  Actions  and the  Common

Law  Actions  in the  federal  bankruptcy  court that  had presided  over  the  bankruptcy  of  its former
policyholder  Johns-Manville  Corporation on the ground that  the suits  violated  injunctions  entered in
connection with confirmation of  the  Johns-Manville  bankruptcy  (the  1986  Orders). The bankruptcy
court  issued a temporary  restraining  order  and  referred  the parties to mediation, which  resulted  in
settlements of the  Statutory  Actions  and the Common Law Actions  (the  Settlements). The Settlements
were  contingent  upon,  among other contingencies, a final  order confirming  that the  1986  Orders
enjoined the Statutory  Actions  and  the  Common Law Actions as  well  as  related contribution  claims
against Travelers  (the Clarifying Order).

Numerous  proceedings  took  place in the  bankruptcy,  district  and  appellate  courts concerning  the

entry  of the  Clarifying  Order  and approval  of the  Settlements and  their  effect  on other  parties.

In  2009, the  United States  Supreme Court affirmed the bankruptcy court’s entry  of  the  Clarifying
Order  enjoining  the  Statutory Actions  and the Common  Law  Actions. The  Supreme  Court  remanded
the  case  to the  lower  courts  to  consider  any properly  preserved objections.  Following resolution, after
remand,  of one remaining objection  (regarding potential  contribution claims  against  the Company), and
entry  of a final  judgment  by the  bankruptcy court  approving  the Settlements,  Travelers made  payment
of  $579 million  to  the plaintiffs  in  January 2015,  comprising  $502  million  provided  under  the  terms of
the  Settlements,  plus  pre-judgment and  post-judgment interest  totaling $77  million.  The  payment was
fully accrued  in the  Company’s  financial statements  at December  31, 2014.

Other  Proceedings  Not  Arising Under  Insurance  Contracts or  Reinsurance  Agreements

The Company  is  involved in other  lawsuits, including  lawsuits  alleging  extra-contractual  damages
relating  to insurance contracts or  reinsurance agreements, that  do  not arise under insurance  contracts
or reinsurance  agreements.  The legal  costs associated  with such lawsuits are  expensed  in  the period in
which the costs  are  incurred.  Based  upon  currently available  information, the  Company does not
believe  it is reasonably  possible  that any  such  lawsuit or related lawsuits would be  material  to  the
Company’s results  of  operations  or  would have a material  adverse effect  on  the  Company’s  financial
position or liquidity.

Gain Contingency

On August 17, 2010,  in a  reinsurance  dispute in New  York state  court  captioned United States
Fidelity  &  Guaranty Company v. American Re-Insurance  Company,  et al., the trial court granted summary
judgment for United  States  Fidelity and  Guaranty Company (USF&G),  a subsidiary of the Company,
and  denied summary judgment for the reinsurers. The Court of Appeals largely affirmed the entry of
summary judgment,  but  remanded two  discrete issues for  trial.  Thereafter, the  reinsurers filed  a motion
with the  trial  court  to  change  venue,  and the trial court denied the  motion.

On November 7,  2016, the Company  agreed to a settlement with one of  the three defendants then

remaining  in this  dispute. The Company  received payment under the settlement in the  fourth quarter
of  2016  and,  as  a  result,  recognized  a  $126  million  pre-tax  ($82  million  after-tax)  gain  in  the  fourth
quarter, which is  included in  ‘‘other revenues’’  in the consolidated statement of  income. The
reinsurance recoverable balance related to this case was reduced from  approximately $238 million to
approximately $31  million  in the Company’s consolidated balance  sheet.

249

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

16.  CONTINGENCIES, COMMITMENTS AND GUARANTEES  (Continued)

On December 22,  2016, the  Appellate Court, First Department  affirmed the  denial  of  the
reinsurers’  motion to  change venue  and  a trial is set to proceed  on  May 1, 2017 with regard  to the
remaining  two defendants—both  of which  are  subsidiaries  of  the  same company. At  December  31,
2016,  the claim related  to  the  remaining  defendants totaled  $69 million,  comprising $31  million of  a
reinsurance recoverable  plus interest amounting  to $38 million as  of  that  date.  Interest will continue to
accrue  at an annual rate of  9%  until  the amounts owed  by the  remaining  defendants are  paid, though
the  reinsurers  still  party  to the case  contested that interest  is  owed  in a brief filed on June  6, 2016. The
interest  that  would  be  owed as  part of  any  judgment  ultimately  entered  in favor of  the Company
related  to  the remaining  defendants  is  treated for accounting  purposes as  a gain  contingency  in
accordance with FASB Topic  450, Contingencies, and accordingly has not been recognized in the
Company’s  consolidated  financial  statements.

Other  Commitments  and  Guarantees

Commitments

Investment  Commitments—The  Company has unfunded commitments  to private equity  limited
partnerships and  real estate partnerships in  which it  invests. These commitments totaled $1.60 billion
and  $1.71 billion  at  December  31,  2016  and 2015, respectively.

Guarantees

In  the ordinary  course of  selling  businesses  to third parties, the Company has  agreed to indemnify

purchasers for  losses  arising  out of  breaches of representations and warranties with  respect to the
businesses being  sold, covenants  and  obligations  of the Company and/or its subsidiaries and, in certain
cases,  obligations  arising  from  certain  liabilities.  Such indemnification provisions generally are
applicable from  the  closing date to  the  expiration of  the relevant statutes of limitations, although, in
some  cases,  there  may  be agreed  upon  term limitations or no term limitations.  Certain  of these
contingent obligations are  subject to  deductibles which have to be incurred by the obligee before the
Company  is obligated to make payments.  The maximum  amount of the Company’s  contingent
obligation for  indemnifications related  to the  sale  of  businesses that are quantifiable was $358 million
at December  31,  2016,  of  which $2  million was  recognized on the balance sheet at that date.

The Company also  has  contingent  obligations  for guarantees related to certain investments, third-

party  loans related  to  certain  investments, certain  insurance policy obligations of former insurance
subsidiaries and  various  other indemnifications. The Company also provides standard indemnifications
to service providers  in  the normal course of business. The indemnification clauses are often standard
contractual terms.  The  maximum  amount of the  Company’s  obligation for guarantees  of certain
investments and  third-party  loans related  to certain  investments that are quantifiable was $150 million
at December  31,  2016,  approximately $75 million of which is indemnified by  a third party. The
maximum amount of  the Company’s  obligation related to the guarantee of certain insurance  policy
obligations of a former  insurance subsidiary  was  $480  million at December 31, 2016, all of which is
indemnified  by a  third party.

Certain of the guarantees  and indemnifications described above have no stated or notional
amounts or limitation  to  the maximum  potential  future  payments,  and, accordingly,  the Company is
unable  to provide an estimate of  the maximum potential  payments for such arrangements.

250

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

17.  NONCASH INVESTING  AND FINANCING ACTIVITIES

There were  no  material noncash financing or investing  activities during  the years  ended

December 31, 2016,  2015  and 2014.

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES

The following  consolidating  financial statements  of  the Company have  been  prepared pursuant to

Rule 3-10  of  Regulation  S-X.  These consolidating financial statements  have been  prepared from  the
Company’s financial information  on  the  same basis of accounting  as the  consolidated  financial
statements. The  Travelers  Companies,  Inc. (excluding  its  subsidiaries,  TRV) has  fully and
unconditionally  guaranteed certain debt  obligations of Travelers Property Casualty  Corp. (TPC), which
totaled  $700  million  at  December 31,  2016.

Prior  to  the merger  of  TPC and The St.  Paul Companies, Inc.  in 2004,  TPC  fully  and

unconditionally  guaranteed the  payment  of  all principal, premiums, if  any,  and interest on  certain debt
obligations of its wholly-owned subsidiary,  Travelers  Insurance  Group  Holdings,  Inc.  (TIGHI).
Concurrent  with the  merger, TRV fully  and unconditionally  assumed  such guarantee obligations of
TPC. TPC is deemed to have  no  assets  or operations independent  of  TIGHI. Consolidating  financial
information for  TIGHI has not  been  presented  herein  because such financial  information  would be
substantially the  same  as  the financial  information provided  for TPC.

251

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT  OF INCOME  (Unaudited)
For  the  year ended December 31, 2016

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment  gains  (losses)(1) . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . .

$16,788
1,569
458
30
248

Total revenues . . . . . . . . . . . . . . . . . . . . .

19,093

Claims  and  expenses
Claims  and claim adjustment  expenses . . . . . .
Amortization of  deferred acquisition  costs . . .
General and administrative  expenses . . . . . . .
Interest  expense . . . . . . . . . . . . . . . . . . . . . .

Total claims and  expenses . . . . . . . . . . . . .

Income  (loss)  before  income  taxes . . . . . . .
Income  tax expense (benefit) . . . . . . . . . . . .
Net  income of subsidiaries . . . . . . . . . . . . . .

10,232
2,702
2,928
48

15,910

3,183
999
—

$7,746
720
—
39
36

8,541

4,838
1,283
1,242
—

7,363

1,178
208
—

$ — $ —
—
—
—
(21)

13
—
(1)
—

12

—
—
5
315

320

(21)

—
—
(21)
—

(21)

(308)
(168)
3,154

—
—
(3,154)

$24,534
2,302
458
68
263

27,625

15,070
3,985
4,154
363

23,572

4,053
1,039
—

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,184

$ 970

$3,014

$(3,154)

$ 3,014

(1) Total other-than-temporary  impairments (OTTI)  for the year ended December 31, 2016, and the

amounts  comprising total  OTTI  that were recognized in  net realized investment gains (losses) and
in other  comprehensive  income  (OCI), were  as follows:

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Total  OTTI losses . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI losses  recognized in  net  realized  investment

$(19)

$(20)

$ (1)

gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI losses  recognized in  OCI . . . . . . . . . . . . . . .

$(13)
$ (6)

$(15)
$ (5)

$ (1)
$—

$—

$—
$—

$(40)

$(29)
$(11)

252

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT  OF INCOME  (Unaudited)
For  the  year ended December 31, 2015

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

(in millions)

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment  gains  (losses)(1) . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . .

$16,254
1,612
460
13
78

$7,620
760
—
(11)
21

$ — $ —
—
—
—
—

7
—
1
—

Total revenues . . . . . . . . . . . . . . . . . . . . .

18,417

8,390

Claims  and  expenses
Claims  and claim adjustment  expenses . . . . . .
Amortization of  deferred acquisition  costs . . .
General and administrative  expenses . . . . . . .
Interest  expense . . . . . . . . . . . . . . . . . . . . . .

9,208
2,627
2,853
48

Total claims and  expenses . . . . . . . . . . . . .

14,736

Income  (loss)  before  income  taxes . . . . . . .
Income  tax expense (benefit) . . . . . . . . . . . .
Net  income  of  subsidiaries . . . . . . . . . . . . . .

3,681
1,015
—

4,515
1,258
1,225
—

6,998

1,392
394
—

8

—
—
16
325

341

—

—
—
—
—

—

(333)
(108)
3,664

—
—
(3,664)

$23,874
2,379
460
3
99

26,815

13,723
3,885
4,094
373

22,075

4,740
1,301
—

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,666

$ 998

$3,439

$(3,664)

$ 3,439

(1) Total other-than-temporary  impairments (OTTI)  for the year ended December 31, 2015, and the

amounts  comprising total  OTTI  that were recognized in  net realized investment gains (losses) and
in other  comprehensive  income  (OCI), were  as follows:

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Total  OTTI losses . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI losses  recognized in  net  realized  investment

$(19)

$(35)

$—

gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI losses  recognized in  OCI . . . . . . . . . . . . . . .

$(18)
$ (1)

$(34)
$ (1)

$—
$—

$—

$—
$—

$(54)

$(52)
$ (2)

253

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT  OF INCOME  (Unaudited)
For  the  year ended December 31, 2014

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Revenues
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  investment  income . . . . . . . . . . . . . . . . .
Fee income . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment  gains(1) . . . . . . . . . .
Other  revenues . . . . . . . . . . . . . . . . . . . . . .

$16,097
1,874
448
12
125

Total revenues . . . . . . . . . . . . . . . . . . . . .

18,556

Claims  and  expenses
Claims  and claim adjustment  expenses . . . . . .
Amortization of  deferred acquisition  costs . . .
General and administrative  expenses . . . . . . .
Interest  expense . . . . . . . . . . . . . . . . . . . . . .

9,274
2,604
2,755
48

Total claims and  expenses . . . . . . . . . . . . .

14,681

Income  (loss)  before  income  taxes . . . . . . .
Income  tax expense (benefit) . . . . . . . . . . . .
Net  income  of  subsidiaries . . . . . . . . . . . . . .

3,875
1,095
—

$7,616
907
2
64
20

8,609

4,596
1,278
1,194
—

7,068

1,541
417
—

$ — $ —
—
—
—
—

6
—
3
—

9

—
—
15
321

336

—

—
—
—
—

—

(327)
(115)
3,904

—
—
(3,904)

$23,713
2,787
450
79
145

27,174

13,870
3,882
3,964
369

22,085

5,089
1,397
—

Net income . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,780

$1,124

$3,692

$(3,904)

$ 3,692

(1) Total other-than-temporary  impairments (OTTI)  for the year ended December 31, 2014, and the

amounts  comprising total  OTTI  that were recognized in  net realized investment gains and in other
comprehensive income (OCI),  were  as follows:

(in millions)

Total  OTTI losses . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI losses  recognized in  net  realized  investment

TPC

$(16)

gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .

OTTI gains  recognized in  OCI

$(19)
$ 3

Other
Subsidiaries

TRV

Eliminations

Consolidated

$(6)

$(7)
$ 1

$—

$—
$—

$—

$—
$—

$(22)

$(26)
$ 4

254

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING  STATEMENT  OF COMPREHENSIVE INCOME (Unaudited)
For  the  year ended December 31, 2016

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,184

$ 970

$3,014

$(3,154)

$3,014

Other  comprehensive  income  (loss):
Changes in net  unrealized gains  on investment

securities:
Having  no  credit losses  recognized  in  the

consolidated statement of income . . . . . . .

(696)

(198)

Having  credit losses  recognized in  the

consolidated  statement  of income . . . . . . .

Net  changes in  benefit plan  assets  and

obligations . . . . . . . . . . . . . . . . . . . . . . . . .

Net changes  in  unrealized  foreign  currency

translation . . . . . . . . . . . . . . . . . . . . . . . . .

Other  comprehensive loss before  income

taxes and  other
comprehensive  loss  of subsidiaries . . . .
Income  tax benefit . . . . . . . . . . . . . . . . . . . . .

Other  comprehensive  loss, net of  taxes,

before  other
comprehensive  loss of  subsidiaries . . . .
Other  comprehensive loss  of  subsidiaries . . . . .

Other  comprehensive loss . . . . . . . . . . . .

11

25

73

10

11

(114)

(587)
(222)

(291)
(66)

11

—

(20)

—

(9)
(1)

(365)
—

(365)

(225)
—

(225)

(8)
(590)

(598)

—

—

—

—

—
—

—
590

590

(883)

21

16

(41)

(887)
(289)

(598)
—

(598)

Comprehensive  income . . . . . . . . . . . . . .

$1,819

$ 745

$2,416

$(2,564)

$2,416

255

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING  STATEMENT  OF COMPREHENSIVE INCOME (Unaudited)
For  the  year ended December 31, 2015

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,666

$ 998

$ 3,439

$(3,664)

$ 3,439

Other  comprehensive  income  (loss):
Changes in net  unrealized gains  on investment

securities:
Having  no  credit losses  recognized  in  the

consolidated statement of income . . . . . .

(610)

(407)

(3)

Having  credit losses  recognized in  the

consolidated  statement  of income . . . . . .

(12)

Net  changes in benefit  plan assets  and

obligations . . . . . . . . . . . . . . . . . . . . . . . .

2

Net changes  in  unrealized  foreign  currency

(2)

—

translation . . . . . . . . . . . . . . . . . . . . . . . . .

(306)

(155)

Other  comprehensive  income  (loss)
before  income taxes  and  other
comprehensive  loss of  subsidiaries . . . .
Income  tax expense (benefit) . . . . . . . . . . . . .

Other  comprehensive  income  (loss), net
of taxes,  before  other comprehensive
loss of  subsidiaries . . . . . . . . . . . . . . .
Other  comprehensive loss  of  subsidiaries . . . .

Other  comprehensive loss . . . . . . . . . . . .

(926)
(257)

(564)
(156)

(669)
—

(669)

(408)
—

(408)

40
(1,077)

(1,037)

—
1,077

1,077

—

—

—

—

—
—

—

64

—

61
21

(1,020)

(14)

66

(461)

(1,429)
(392)

(1,037)
—

(1,037)

Comprehensive  income . . . . . . . . . . . . . .

$1,997

$ 590

$ 2,402

$(2,587)

$ 2,402

256

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING  STATEMENT  OF COMPREHENSIVE INCOME (Unaudited)
For  the  year ended December 31, 2014

(in millions)

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,780

$1,124

$3,692

$(3,904)

$3,692

Other  comprehensive  income  (loss):
Changes in net  unrealized gains  on investment

securities:
Having  no  credit losses  recognized  in  the

consolidated statement of income . . . . . . .

681

289

Having  credit  losses recognized in  the

consolidated statement of  income . . . . . . .

9

Net  changes in benefit  plan assets  and

obligations . . . . . . . . . . . . . . . . . . . . . . . . .

(15)

Net  changes in  unrealized foreign  currency

(7)

(8)

6

—

(471)

translation . . . . . . . . . . . . . . . . . . . . . . . . .

(173)

(116)

—

Other  comprehensive  income  (loss) before
income  taxes  and  other  comprehensive
income  of  subsidiaries . . . . . . . . . . . . .
Income  tax expense  (benefit) . . . . . . . . . . . . .

Other  comprehensive income  (loss), net  of

taxes, before other  comprehensive
income  of  subsidiaries . . . . . . . . . . . . .
Other  comprehensive  income  of  subsidiaries . .

Other  comprehensive income . . . . . . . . . .

502
207

295
—

295

158
81

(465)
(163)

77
—

77

(302)
372

70

—
(372)

(372)

—

—

—

—

—
—

976

2

(494)

(289)

195
125

70
—

70

Comprehensive  income . . . . . . . . . . . . . .

$3,075

$1,201

$3,762

$(4,276)

$3,762

257

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2016

(in millions)

Assets
Fixed maturities,  available  for  sale,  at  fair  value

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

(amortized cost  $59,650)

. . . . . . . . . . . . . . . .

$42,014

$18,452

$

49

$

Equity securities, available for sale, at fair value

(cost $504) . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . .

169
56
2,447
2,569

408
872
791
878

Total investments . . . . . . . . . . . . . . . . . . . . .

47,255

21,401

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income accrued . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables
. . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder receivables . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible  assets . . . . . . . . . . . . . . . . . . .
Investment in  subsidiaries . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .

141
441
4,545
5,664
536
1,741
216
3,656
2,578
202
—
1,973

164
183
2,177
2,623
53
182
224
953
1,002
66
—
370

155
—
1,627
1

1,832

2
6
—
—
—
—
25
—
—
—
27,137
34

—

—
—
—
—

—

—
—
—
—
—
—
—
—
—
—
(27,137)
—

$ 60,515

732
928
4,865
3,448

70,488

307
630
6,722
8,287
589
1,923
465
4,609
3,580
268
—
2,377

Total assets . . . . . . . . . . . . . . . . . . . . . . . . .

$68,948

$29,398

$ 29,036

$(27,137)

$100,245

Liabilities
Claims and claim adjustment expense reserves . . .
Unearned premium reserves
. . . . . . . . . . . . . . .
Contractholder payables . . . . . . . . . . . . . . . . . .
Payables for reinsurance  premiums . . . . . . . . . . .
Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . .

$32,168
8,575
3,656
156
693
4,106

Total liabilities . . . . . . . . . . . . . . . . . . . . . . .

49,354

$15,781
3,754
953
117
—
1,239

21,844

$

— $
—
—
—
5,744
82

5,826

—
—
—
—
—
—

—

Shareholders’ equity
Common stock (1,750.0 shares authorized; 279.6

shares issued and outstanding) . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . .
Retained earnings
Accumulated other comprehensive income (loss)
.
Treasury stock, at cost (489.5 shares) . . . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . . .

—
11,634
7,933
27
—

19,594

390
6,499
797
(132)
—

7,554

22,614
—
32,185
(755)
(30,834)

23,210

(390)
(18,133)
(8,719)
105
—

(27,137)

$ 47,949
12,329
4,609
273
6,437
5,427

77,024

22,614
—
32,196
(755)
(30,834)

23,221

Total liabilities and shareholders’ equity . . . . .

$68,948

$29,398

$ 29,036

$(27,137)

$100,245

258

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING BALANCE SHEET (Unaudited)
At December 31, 2015

(in millions)

Assets
Fixed maturities,  available  for  sale,  at  fair  value

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

(amortized cost  $58,878)

. . . . . . . . . . . . . . . .

$42,289

$18,323

$

46

$

Equity securities, available for sale, at fair value

(cost $528) . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . .
Short-term securities . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . .

189
56
1,947
2,516

375
933
1,178
930

Total investments . . . . . . . . . . . . . . . . . . . . .

46,997

21,739

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income accrued . . . . . . . . . . . . . . . .
Premiums receivable . . . . . . . . . . . . . . . . . . . . .
Reinsurance recoverables
. . . . . . . . . . . . . . . . .
Ceded unearned premiums . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Contractholder receivables . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible  assets . . . . . . . . . . . . . . . . . . .
Investment in  subsidiaries . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .

225
453
4,336
5,849
610
1,660
178
3,387
2,573
203
—
1,958

153
185
2,101
3,061
46
189
83
987
1,000
76
—
344

141
—
1,546
1

1,734

2
4
—
—
—
—
35
—
—
—
27,573
16

—

—
—
—
—

—

—
—
—
—
—
—
—
—
—
—
(27,573)
—

$ 60,658

705
989
4,671
3,447

70,470

380
642
6,437
8,910
656
1,849
296
4,374
3,573
279
—
2,318

Total assets . . . . . . . . . . . . . . . . . . . . . . . . .

$68,429

$29,964

$ 29,364

$(27,573)

$100,184

Liabilities
Claims and claim adjustment expense reserves . . .
Unearned premium reserves
. . . . . . . . . . . . . . .
Contractholder payables . . . . . . . . . . . . . . . . . .
Payables for reinsurance  premiums . . . . . . . . . . .
Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . .

$31,965
8,335
3,387
175
693
3,958

Total liabilities . . . . . . . . . . . . . . . . . . . . . . .

48,513

Shareholders’ equity
Common stock (1,750.0 shares authorized; 295.9

shares issued and outstanding) . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . .
Retained earnings
Accumulated other comprehensive income (loss)
.
Treasury stock, at cost (467.6 shares) . . . . . . . . . .

Total shareholders’ equity . . . . . . . . . . . . . . .

—
11,634
7,888
394
—

19,916

$16,330
3,636
987
121
—
1,221

22,295

390
6,499
688
92
—

7,669

$

— $
—
—
—
5,651
127

5,778

—
—
—
—
—
—

—

22,172
—
29,933
(157)
(28,362)

23,586

(390)
(18,133)
(8,564)
(486)
—

(27,573)

$ 48,295
11,971
4,374
296
6,344
5,306

76,586

22,172
—
29,945
(157)
(28,362)

23,598

Total liabilities and shareholders’ equity . . . . .

$68,429

$29,964

$ 29,364

$(27,573)

$100,184

259

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For  the  year ended December 31, 2016

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to reconcile net income to net cash

provided by operating activities . . . . . . . . . . . . . . .

Net cash provided by operating activities . . . . . . . . . .

Cash flows from investing activities
Proceeds from  maturities  of fixed  maturities . . . . . . . .
Proceeds from sales of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of short-term securities . . . . . . .
Securities transactions in course of settlement . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . .

Cash flows from financing activities
Treasury stock acquired—share repurchase

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

$ 2,184

$

970

$ 3,014

$(3,154)

$ 3,014

1,085

3,269

66

1,036

(119)

2,895

156

(2,998)

6,589

2,380

768
47
—
586

(7,921)
(6)
(1)
(453)
(501)
12
(334)

(1,214)

647
45
69
253

(3,676)
(42)
(47)
(127)
383
(32)
(10)

(157)

6

2
—
—
—

(12)
(3)
—
—
(81)
(1)
—

(89)

—

—
—
—
—

—
—
—
—
—
—
—

—

—

authorization . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

(2,400)

Treasury stock acquired—net employee share-based

compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt
Issuance of debt
. . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock—employee share options . . .
Dividends paid to parent company . . . . . . . . . . . . . .

Net cash used in financing activities . . . . . . . . . . . . .

Effect of exchange rate changes on cash . . . . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . .

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow information
Income taxes paid (received) . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
—
—
—
(2,140)

(2,140)

1

(84)
225

141

737
47

$

$
$

—
—
—
—
—
(858)

(858)

(10)

11
153

164

$

(72)
(757)
(400)
491
332
—

(2,806)

—

—
2

2

$

—
—
—
—
—
2,998

2,998

—

—
—

$ —

$
287
$ —

$ (132)
311
$

$ —
$ —

260

1,188

4,202

8,975

1,417
92
69
839

(11,609)
(51)
(48)
(580)
(199)
(21)
(344)

(1,460)

(2,400)

(72)
(757)
(400)
491
332
—

(2,806)

(9)

(73)
380

307

892
358

$

$
$

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For  the  year ended December 31, 2015

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to reconcile net income to net cash

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

$ 2,666

$

998

$ 3,439

$(3,664)

$ 3,439

provided by operating activities . . . . . . . . . . . . . . .

(577)

Net cash provided by operating activities . . . . . . . . . .

2,089

Cash flows from investing activities
Proceeds from  maturities  of fixed  maturities . . . . . . . .
Proceeds from sales of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .
Net sales (purchases) of short-term securities . . . . . . .
Securities transactions in course of settlement . . . . . . .
Acquisition, net of cash acquired . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,543

1,227
25
—
503

(8,276)
(3)
(1)
(423)
179
(52)
(13)
(343)

Net cash provided by (used in) investing activities . . . .

366

Cash flows from financing activities
Treasury stock acquired—share repurchase

authorization . . . . . . . . . . . . . . . . . . . . . . . . . . .

Treasury stock acquired—net employee share-based

compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt
Issuance of debt
. . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock—employee share options . . .
Excess tax benefits from share-based payment

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to parent company . . . . . . . . . . . . . .
Capital contributions, loans and other transactions

—

—
—
—
—
—

414

1,412

3,563

723
34
31
210

(3,787)
(43)
(122)
(111)
(489)
(61)
—
39

(13)

—

—
—
—
—
—

—
(2,450)

—
(1,383)

330

3,769

(172)

(3,836)

10

—
—
—
—

(27)
(3)
—
—
(16)
—
—
—

(36)

(3,150)

(74)
(739)
(400)
392
183

55
—

—

—

—
—
—
—

—
—
—
—
—
—
—
—

—

—

—
—
—
—
—

—
3,833

3

(5)

3,434

11,116

1,950
59
31
713

(12,090)
(49)
(123)
(534)
(326)
(113)
(13)
(304)

317

(3,150)

(74)
(739)
(400)
392
183

55
—

—

between subsidiaries . . . . . . . . . . . . . . . . . . . . . .

—

(3)

Net cash used in financing activities . . . . . . . . . . . . .

(2,450)

(1,386)

(3,733)

3,836

(3,733)

Effect of exchange rate changes on cash . . . . . . . . . . .

Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . .

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . .

$

(1)

4
221

225

(11)

2
151

153

$

—

—
2

2

$

—

—
—

$ —

$

(12)

6
374

380

Supplemental disclosure of cash flow information
Income taxes paid (received) . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,032
47
$

$
384
$ —

$ (209)
318
$

$ —
$ —

$ 1,207
365
$

261

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

18.  CONSOLIDATING  FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES,  INC. AND

SUBSIDIARIES  (Continued)

CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)
For  the  year ended December 31, 2014

(in millions)

Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net adjustments to reconcile net income to net cash

provided by operating activities . . . . . . . . . . . . . . .

Net cash provided by operating activities . . . . . . . . . .

Cash flows from investing activities
Proceeds from  maturities  of fixed  maturities . . . . . . . .
Proceeds from sales of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .

Purchases of investments:

Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investments . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . .
Net purchases of short-term securities . . . . . . . . . . . .
Securities transactions in course of settlement . . . . . . .
Acquisition, net of cash acquired . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by (used in) investing activities . . . .

Cash flows from financing activities
Treasury stock acquired—share repurchase

authorization . . . . . . . . . . . . . . . . . . . . . . . . . . .

Treasury stock acquired—net employee share-based

compensation . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to shareholders . . . . . . . . . . . . . . . . .
Issuance of common stock—employee share options . . .
Excess tax benefits from share-based payment

arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid to parent company . . . . . . . . . . . . . .

Net cash used in financing activities . . . . . . . . . . . . .

Effect of exchange rate changes on cash . . . . . . . . . . .

Net increase (decrease) in cash . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . .

Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental disclosure of cash flow information
Income taxes paid (received) . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TPC

Other
Subsidiaries

TRV

Eliminations

Consolidated

$ 2,780

$ 1,124

$ 3,692

$(3,904)

$ 3,692

343

3,123

(293)

831

118

3,810

(167)

(4,071)

6,625

4,258

453
43
14
378

(4,465)
(42)
(26)
(149)
(223)
38
(3)
(8)

268

—

—
—
—

—
(1,093)

(1,093)

(9)

(3)
154

11

1
4
—
—

(4)
(7)
—
—
(7)
—
—
—

(2)

(3,275)

(57)
(729)
195

57
—

(3,809)

—

(1)
3

2

—

—
—
—
—

—
—
—
—
—
—

—

—

—

—
—
—

—
4,071

4,071

—

—
—

1

3,693

10,894

1,049
158
15
855

(11,325)
(52)
(48)
(554)
(498)
82
(12)
(358)

206

(3,275)

(57)
(729)
195

57
—

(3,809)

(10)

80
294

374

$

151

$

$ —

$

$
336
$ —

$ (136)
318
$

$ —
$ —

$ 1,147
365
$

595
111
1
477

(6,856)
(3)
(22)
(405)
(268)
44
(9)
(350)

(60)

—

—
—
—

—
(2,978)

(2,978)

(1)

84
137

221

947
47

$

$
$

262

THE  TRAVELERS  COMPANIES,  INC.  AND  SUBSIDIARIES

NOTES  TO  CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

19.  SELECTED QUARTERLY  FINANCIAL  DATA (Unaudited)

2016 (in millions, except per share amounts)

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Total

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,686
5,769

$6,785
5,898

$6,961
6,014

$7,193
5,891

$27,625
23,572

Income  before  income taxes . . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

917
226

887
223

947
231

1,302
359

4,053
1,039

Net  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 691

$ 664

$ 716

$ 943

$ 3,014

Net  income per  share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2.33
2.30

$ 2.27
2.24

$ 2.48
2.45

$ 3.32
3.28

$ 10.39
10.28

2015 (in millions, except per share amounts)

First

Fourth
Quarter Quarter Quarter Quarter

Second

Third

Total

Total  revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total  expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,629
5,481

$6,710
5,634

$6,798
5,491

$6,678
5,469

$26,815
22,075

Income  before  income taxes . . . . . . . . . . . . . . . . . . . . .
Income  tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,148
315

1,076
264

1,307
379

1,209
343

4,740
1,301

Net  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 833

$ 812

$ 928

$ 866

$ 3,439

Net  income per  share(1):

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2.58
2.55

$ 2.56
2.53

$ 3.00
2.97

$ 2.87
2.83

$ 10.99
10.88

(1) Due to  the  averaging of  shares,  quarterly earnings per  share may not add to  the total for the  full

year.

263

Item 9. CHANGES IN  AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL  DISCLOSURE

Not  Applicable.

Item  9A. CONTROLS AND  PROCEDURES

The Company  maintains  disclosure  controls and procedures  (as that term is  defined in

Rules  13a-15(e)  and  15d-15(e) under  the Securities Exchange Act of 1934, as amended  (Exchange
Act)) that are  designed to  ensure that  information  required to be disclosed in the Company’s reports
under the Exchange Act is recorded,  processed, summarized  and  reported within  the time periods
specified in the  Securities  and  Exchange  Commission’s rules and forms, and that such information  is
accumulated  and communicated  to the  Company’s management, including its Chief Executive Officer
and  Chief Financial  Officer,  as  appropriate, to allow timely decisions  regarding required disclosures.
Any  controls and  procedures,  no  matter  how well designed  and operated, can provide only reasonable
assurance of achieving  the desired  control objectives. The Company’s management, with the
participation of  the Company’s  Chief  Executive Officer and Chief Financial Officer, has  evaluated  the
effectiveness of  the  design  and  operation of the Company’s disclosure controls and procedures as of
December  31,  2016.  Based  upon  that  evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer concluded that, as of  December 31, 2016, the design and operation of  the Company’s
disclosure controls  and  procedures  were  effective to accomplish their objectives at the reasonable
assurance  level.

In addition,  there  was no  change  in  the Company’s internal  control  over financial reporting (as
that  term is  defined  in  Rules  13a-15(f)  and 15d-15(f) under the Exchange  Act) that occurred during  the
quarter ended  December  31,  2016  that  has materially affected,  or is reasonably likely to materially
affect, the Company’s internal  control  over financial reporting.

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

264

Management’s  Report  on Internal Control Over Financial Reporting

Management of the  Company  is  responsible  for establishing and maintaining adequate internal
control over financial reporting.  The  Company’s  internal control over  financial reporting is designed to
provide  reasonable  assurances  regarding  the reliability of financial reporting and the preparation of  the
consolidated financial  statements  of the  Company  in accordance  with U.S. generally accepted
accounting  principles.  The  Company’s  accounting policies and internal controls over financial reporting,
established  and  maintained by  management, are under the general oversight of the Company’s Audit
Committee.

The Company’s  internal  control over financial  reporting  includes  those policies and  procedures

that:

• pertain  to the  maintenance of  records  that, in reasonable detail, accurately and fairly reflect the

transactions and dispositions of  the assets  of  the Company;

• provide  reasonable  assurance  that transactions  are  recorded  as necessary to permit  preparation
of  financial statements  in  accordance with U.S. generally accepted  accounting  principles,  and
that  receipts  and  expenditures are being made only in accordance  with authorizations of  the
Company’s  management and  directors; and

• provide  reasonable  assurance  regarding prevention  or  timely detection  of unauthorized

acquisition,  use  or  disposition  of assets that could have a  material  effect  on  the  financial
statements.

Because  of its  inherent  limitations, internal  control over financial reporting may not prevent or

detect misstatements.  Also,  projections  of  any evaluation of effectiveness to future periods are subject
to the risk that  controls may become  inadequate because of changes in conditions, or that the degree
of  compliance  with the  policies  or  procedures may deteriorate.

Management has  assessed  the  Company’s internal  control over financial reporting as of

December 31, 2016.  The standard  measures adopted by  management in making its evaluation are the
measures in  the  Internal  Control—Integrated Framework (2013) published by the Committee of
Sponsoring  Organizations of the Treadway Commission.

Based upon  its  assessment,  management has  concluded that the Company’s internal control over
financial reporting  was effective at  December 31, 2016,  and  that there were no material weaknesses  in
the  Company’s internal control over  financial  reporting  as of that date.

KPMG  LLP, an  independent  registered public accounting firm, which has audited and reported on

the  consolidated  financial  statements  contained in this Form 10-K, has issued its report  on the
effectiveness  of the  Company’s  internal  control over financial reporting  which follows this report.

265

Report  of Independent Registered Public  Accounting Firm

The Board of Directors  and Stockholders
The Travelers  Companies,  Inc.:

We have audited The Travelers  Companies, Inc.  and subsidiaries’ (the Company) internal control

over  financial  reporting  as  of December  31, 2016,  based on criteria established in Internal Control—
Integrated Framework  (2013)  issued by  the Committee of Sponsoring Organizations  of  the Treadway
Commission (COSO). The  Company’s  management is responsible for maintaining effective internal
control over financial reporting  and for  its assessment of  the effectiveness of internal control over
financial reporting,  included  in the  accompanying Management’s Report on Internal Control Over
Financial  Reporting. Our  responsibility  is to  express  an opinion on the  Company’s internal control over
financial reporting  based  on our  audit.

We conducted  our audit  in accordance with the standards  of the Public Company Accounting
Oversight Board  (United States).  Those  standards require that we plan and perform the audit to obtain
reasonable assurance  about  whether  effective internal control over financial reporting was maintained
in all material  respects. Our  audit included obtaining an understanding of internal control over
financial reporting,  assessing the risk  that  a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal  control based on the assessed risk. Our audit  also
included  performing such  other  procedures  as we considered necessary in the circumstances. We  believe
that  our audit  provides  a reasonable  basis for  our  opinion.

A  company’s internal  control  over  financial reporting is a process  designed to provide reasonable

assurance regarding  the reliability  of  financial reporting  and the preparation  of financial  statements for
external  purposes in  accordance  with  generally accepted accounting principles. A company’s internal
control over financial reporting  includes  those policies and procedures that (1) pertain  to the
maintenance of  records  that, in  reasonable  detail, accurately and fairly reflect the transactions and
dispositions  of the  assets  of  the company; (2) provide reasonable assurance that transactions are
recorded  as  necessary to  permit preparation  of  financial statements in accordance with generally
accepted  accounting  principles, and  that  receipts and  expenditures of the company are being made only
in accordance with  authorizations  of management and  directors of the company; and (3) provide
reasonable assurance  regarding  prevention or timely detection of unauthorized acquisition, use, or
disposition of  the company’s  assets  that  could have a  material  effect on the financial  statements.

Because  of its  inherent  limitations, internal control over  financial reporting may not prevent or

detect misstatements.  Also,  projections  of any evaluation of effectiveness to future periods are subject
to the risk that  controls may become  inadequate  because of changes in conditions, or that the degree
of  compliance  with the  policies  or  procedures  may deteriorate.

In  our  opinion,  the Company  maintained, in  all material respects, effective internal  control over

financial reporting  as  of December  31,  2016, based  on  criteria established in Internal  Control—
Integrated Framework  (2013)  issued by  the Committee of Sponsoring Organizations  of  the Treadway
Commission.

We also have audited,  in accordance with the standards of  the Public Company Accounting

Oversight Board  (United States), the  consolidated balance sheet of The Travelers Companies, Inc. and
subsidiaries as  of December 31, 2016 and 2015,  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,  2016, and  our report dated February  16, 2017 expressed an
unqualified  opinion  on  those consolidated financial statements.

/s/  KPMG  LLP

KPMG  LLP

New York, New  York
February 16, 2017

266

Item 9B. OTHER INFORMATION

Executive  Ownership  and  Sales. All  of the Company’s executive officers are subject to the
Company’s executive  stock  ownership  policy.  For a summary  of this policy as currently in  effect,  see
‘‘Compensation Discussion  and Analysis—Stock Ownership  Guidelines, Anti-Hedging and Pledging
Policies, and  Other  Trading  Restrictions’’  in the  Company’s proxy  statement filed  with the  Securities
and  Exchange  Commission  on  April  1,  2016.  From  time  to time, some of the Company’s executives may
determine  that  it  is advisable  to diversify their investments for personal financial planning reasons,  or
may seek liquidity for other  reasons,  and  may,  in compliance with the stock ownership policy,  sell
shares of  common  stock of the Company on  the open market, in private transactions or to the
Company. To effect such  sales, some  of  the Company’s executives  have entered into, and may in the
future enter  into,  trading plans designed  to comply with the Company’s Securities Trading Policy and
the  provisions  of  Rule 10b5-1 under  the  Securities Exchange Act of 1934. The trading plans will  not
reduce any of the  executives’  ownership  of the Company’s shares  below the applicable  executive stock
ownership guidelines.  The  Company  does not undertake any obligation to  report Rule 10b5-1 plans that
may be adopted  by  any  employee or  director  of  the Company in the future, or to  report any
modifications  or termination  of  any publicly announced plan.

Annual Meeting and Record  Date. The Board of Directors  has set  the date  of  the 2017 Annual
Meeting  of  Shareholders  and the related  record  date. The  Annual  Meeting  will  be  held  in Hartford,
CT on May  18,  2017,  and the  shareholders entitled  to receive  notice of  and vote  at the  meeting  will  be
the  shareholders  of  record  at  the  close  of  business  on  March  21,  2017.

267

PART  III

Item 10. DIRECTORS, EXECUTIVE  OFFICERS AND CORPORATE GOVERNANCE

Executive  Officers of  the  Company

Set  forth  below is information  concerning  the Company’s  executive  officers as of February 16,

2017.

Name

Age

Office

Alan D. Schnitzer . . . . . . . . .
Jay  S. Benet . . . . . . . . . . . . .
Brian W.  MacLean . . . . . . . .
William  H. Heyman . . . . . . . .
Avrohom  J. Kess . . . . . . . . . .
Andy  F. Bessette . . . . . . . . . .
John  P. Clifford,  Jr. . . . . . . . .
Michael F.  Klein . . . . . . . . . .
. . . . . . . .
Thomas  M. Kunkel

51 Chief Executive Officer and Director
64 Vice Chairman and Chief Financial Officer
63
President and Chief Operating Officer
68 Vice Chairman and Chief Investment  Officer
48 Vice Chairman and Chief Legal Officer
63 Executive Vice President and Chief Administrative  Officer
61 Executive Vice President—Chief Human  Resources Officer
49 Executive Vice President and President,  Personal Insurance
58 Executive Vice President and President,  Bond  & Specialty

Insurance

Maria Olivo . . . . . . . . . . . . .

52 Executive Vice President—Strategic Development  and Corporate

Treasurer

Kenneth  F. Spence, III . . . . . .
. . . .
Gregory  C.  Toczydlowski

61 Executive Vice President and General Counsel
50 Executive Vice President and President,  Business  Insurance

Alan D.  Schnitzer,  51,  has been  Chief Executive Officer and  Director since December  2015.  He

previously  served  as  Vice Chairman and  Chief  Executive  Officer, Business and  International Insurance
from  July  2014. Mr.  Schnitzer was Vice  Chairman—Financial, Professional & International Insurance
and  Field Management;  Chief  Legal  Officer  from  May 2012 until July 2014 and  Vice Chairman  and
Chief Legal Officer and Executive  Vice  President—Financial, Professional  and  International  Insurance
from  May  2008 until May  2012. He  was  Vice Chairman and  Chief  Legal Officer  from  April  2007  until
May  2008. Prior to  joining  the  Company, he was a partner at the  law firm of Simpson  Thacher  &
Bartlett  LLP.

Jay S.  Benet,  64,  has been  Vice Chairman and Chief  Financial Officer since  August 2005. He
previously  served  as  Executive  Vice President  and Chief Financial  Officer  of  the  Company from  April
2004,  and held  the  same  position  at Travelers Property  Casualty Corp.  from February  2002. Mr. Benet
was the worldwide head  of financial  planning,  analysis and  reporting  at  Citigroup  from  March  2001
until  January  2002,  and  Chief Financial  Officer for  Citigroup’s  Global  Consumer Europe, Middle  East
and  Africa unit from April  2000  until  March 2001. Previously,  he  spent ten  years in various  positions
with Travelers  Life & Annuity,  including  Chief Financial  Officer of Travelers  Life &  Annuity  and
Executive Vice  President, Group Annuity. Prior to joining Travelers Life &  Annuity,  Mr.  Benet  was  a
partner  of  Coopers  &  Lybrand  (now  PricewaterhouseCoopers).

Brian W. MacLean, 63, has been  President and Chief Operating Officer  since June 2008 and in
September 2015,  he  also assumed  responsibility for Business and International Insurance. He previously
served  as Executive  Vice President  and  Chief Operating Officer from May 2005 and was Co-Chief
Operating Officer  from  February  2005.  Mr. MacLean was Executive Vice President, Claim Services
from  2002 until  2005  and  President  of  Select Accounts from  1999 until 2002. Prior to that,
Mr. MacLean  held various  management  positions with a predecessor of the Company since  1988.

William  H. Heyman, 68, has been  Vice Chairman and Chief  Investment Officer since May 2005.

He previously served as Executive  Vice  President  and  Chief Investment Officer from May 2002.
Mr. Heyman  held  various positions  with  Citigroup from 1995 until 2002,  including  the position of

268

chairman  of  Citigroup Investments from  2000 until 2002. Prior to  joining  Citigroup in 1995,
Mr. Heyman was,  successively:  a  managing director  of Salomon  Brothers; Director  of the Division  of
Market  Regulation  of  the  U.S.  Securities and  Exchange  Commission; and a managing director of Smith
Barney.

Avrohom  J. Kess,  48,  has  been Vice Chairman and  Chief Legal  Officer since  December  2016.  Prior

to that, Mr.  Kess  was a  partner,  member  of the Corporate Department and Head of the Public
Company Advisory Practice  at  the  law  firm of Simpson Thacher & Bartlett LLP, which he joined in
1995.

Andy F.  Bessette,  63,  has been  Executive Vice  President  and Chief Administrative Officer since
January 2002. Mr.  Bessette previously  held various  management positions  with predecessors  of the
Company since  1980, including,  Vice  President, Corporate Real Estate and Services  at Travelers
Property Casualty Corp.

John  P.  Clifford, Jr.,  61,  has been  Executive Vice President—Chief Human  Resources Officer since

May 2007. He  previously served  as  Senior Vice President—Human Resources from February 2002 and
previously held  various management  positions with the Company since 1984.

Michael F. Klein, 49, has been Executive Vice President and  President, Personal  Insurance,  and

Head of  Enterprise  Business  Intelligence & Analytics since  May  2016. He previously served as
Executive Vice  President  and President,  Personal Insurance from July 2015,  Executive Vice President
and  Co-President, Business  Insurance  from July 2014, Executive Vice President, Middle  Market from
November  2012,  President of Middle  Market from March  2010, President  of Commercial Accounts
from  September  2007,  and Senior  Vice  President, Industry and  Product  Group from  June  2007. Prior  to
that  Mr. Klein  held  various  positions  with  the Company since  1990.

Thomas  M.  Kunkel,  58,  has been  Executive Vice President and  President of Bond &  Specialty

Insurance since May  2015.  He  previously served as  President of the Bond & Financial Products
organization from  2005. Prior  to  that,  Mr. Kunkel  held  various positions with the Company or its
predecessors  since  1984, including  Regional Chief Underwriting Officer for Bond’s Construction Surety
business, head  of  Bond’s field  management  organization, and head of Bond’s  Commercial Surety
business.

Maria Olivo,  52,  has been  Executive Vice President—Strategic Development and Corporate
Treasurer since July  2010. She  previously served  as Executive Vice  President—Treasurer  from June
2009 and  Executive Vice President—Market  Development  from  October  2007.  Prior  to that  Ms.  Olivo
held various  positions  with  the  Company  or  its  predecessors since 2002,  including  leading Corporate
Development,  Investor Relations  and  Corporate  Communications. Ms.  Olivo  was  deputy  head  of
Strategic Investments  at  Swiss  Re Capital Partners from April 2000  until  June  2002. Prior  to  joining
Swiss Re  Capital  Partners, she was a  director in  Salomon  Smith Barney’s  Investment  Bank.

Kenneth  F.  Spence, III,  61,  has been Executive Vice President and General  Counsel since  January
2005.  He previously served as Senior  Vice President and General Counsel from August  2004  and held
various  other legal  positions  with  the  Company or its predecessors since 1996.

Gregory  C. Toczydlowski, 50, has been Executive Vice  President  and President of Business
Insurance since June  2016. He  previously  served as Executive Vice President and President, Small
Commercial  and  Business  Insurance Technology and Operations from July 2015 and  Executive  Vice
President  and President  of  Personal Insurance  from  July  2009. Prior to that, Mr. Toczydlowski held
various  positions with  the Company  or its predecessors  since 1990, including Chief Operating  Officer  of
Personal Insurance  and  Chief Financial Officer  for the  independent  agency distribution channel within
Personal Insurance.

269

Code  of  Ethics

The Company has  adopted  a Code  of Business Conduct  and Ethics (Code of Ethics) that applies
to all  employees, including  executive  officers, and  to directors. The Code  of Ethics is available on the
Corporate Governance page of  the  Company’s internet website at www.travelers.com. If the Company
ever were to  amend or  waive any provision of its Code of Ethics that applies to  the Company’s
principal executive officer,  principal financial officer, principal accounting officer or any  person
performing  similar functions,  the  Company intends  to satisfy its disclosure obligations, if any, with
respect  to any such waiver or amendment by  posting such information on its internet  website set forth
above  rather than by  filing a  Form 8-K.

Other

The following  sections  of  the Company’s Proxy Statement relating to its Annual Meeting  of

Shareholders  to  be held May  18,  2017  are incorporated herein by reference: ‘‘Item 1—Election  of
Directors—Nominees  for Election  of  Directors,’’ ‘‘Governance of Your Company—Director
Nominations,’’ ‘‘Section  16(a)  Beneficial Ownership Reporting Compliance’’  and ‘‘Board of Directors
Information.’’

Item 11. EXECUTIVE COMPENSATION

The following  sections  of  the Company’s Proxy Statement relating to its Annual Meeting  of

Shareholders  to  be held May  18,  2017  are incorporated herein by reference: ‘‘Compensation Discussion
and  Analysis,’’ ‘‘Compensation  Committee  Report,’’ ‘‘Tabular Executive Compensation Disclosure’’ and
‘‘Non-Employee  Director  Compensation.’’

Item 12. SECURITY OWNERSHIP  OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND  RELATED SHAREHOLDER MATTERS

The ‘‘Share  Ownership  Information’’ section of  the Company’s  Proxy Statement  relating to its

Annual Meeting  of Shareholders  to  be  held May  18, 2017 is incorporated  herein by reference.

270

EQUITY COMPENSATION PLAN INFORMATION

The following table  sets  forth  information as of  December 31,  2016 regarding the Company’s

equity  compensation  plans. The only plan pursuant to which  the Company may currently make
additional equity grants is  The  Travelers  Companies, Inc. Amended and Restated 2014 Stock Incentive
Plan  (the  2014  Incentive  Plan)  which,  upon approval by the Company’s shareholders in May 2014,
replaced  The  Travelers  Companies, Inc.  Amended and Restated 2004  Stock  Incentive Plan, as amended
(the 2004 Incentive Plan). The  2004  Incentive  Plan had replaced prior share-based incentive plans
(legacy plans), which  were then  terminated. Outstanding grants were not affected by the termination  of
these legacy plans.

Number of
securities to  be
issued upon exercise
of outstanding
options, warrants
and rights
(a)

Weighted average
exercise price of
outstanding options,
warrants and rights
(b)

Number of securities
remaining available  for
future issuance  under
equity compensation
plans (excluding
securities reflected  in
column (a))
(c)

Plan Category

Equity compensation plans  approved  by

security  holders(1) . . . . . . . . . . . . . . . . .

12,147,338(2)

$87.34 per share(3)

8,429,404(4)

(1) In  addition  to the  2004  Incentive  Plan and the  2014  Incentive Plan,  also included are certain  plans
for employees in  the  United  Kingdom  and  the Republic  of Ireland and The Travelers Deferred
Compensation  Plan  for  Non-Employee  Directors.  Shares  delivered under  these plans are issued
pursuant  to  the  2004  Incentive  Plan  and  the 2014 Incentive Plan.

(2) Total includes (i)  8,593,760 stock  options, (ii) 1,335,981 performance  shares and dividend
equivalents accrued  thereon  (assuming issuance of 100% of performance shares granted),
(iii)  1,825,666  restricted stock  units,  (iv) 297,483 director deferred stock awards and dividend
equivalents accrued  thereon  and  (v) 94,448 common stock units credited to the deferred
compensation  accounts  of  certain non-employee directors in lieu of cash compensation, at the
election  of such directors.

(3) The weighted average exercise prices for both the 2004 Incentive Plan  and the 2014  Incentive Plan
relate  only to stock  options. The  calculation of the weighted average  exercise price does not
include  outstanding  equity  awards that are received or exercised for no consideration and also  does
not include common  stock units  credited to  the deferred compensation accounts of certain
non-employee  directors  at fair market  value in lieu of cash compensation at the election of such
directors.

(4) These shares are  available for grant as  of  December 31, 2016 under the 2014 Incentive Plan

pursuant  to  which the  Compensation Committee of the Board of Directors may make  various
stock-based awards  including  nonqualified  stock options, incentive  stock options, stock appreciation
rights, restricted  stock, restricted stock units, deferred stock, deferred stock units,  performance
awards  and other  stock-based or  stock-denominated  awards  with respect to the Company’s
common stock. This  includes 10 million shares  initially  authorized for issuance under the 2014
Incentive Plan and  shares  subject to  awards under the 2004 Incentive Plan that expired, were
cancelled,  forfeited, settled in  cash  or otherwise terminated without the issuance of shares.

271

Item 13. CERTAIN RELATIONSHIPS  AND  RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE

The ‘‘Item  1—Election  of  Directors—Nominees for  Election of Directors,’’ ‘‘Governance of Your

Company—Director Independence  and  Independence Determinations’’ and ‘‘Governance of Your
Company—Transactions with  Related  Persons and Certain Control Persons—Related Person
Transaction Approval’’  sections  of the  Company’s Proxy Statement relating to its Annual Meeting of
Shareholders to  be  held May  18,  2017  are incorporated  herein by reference.

Item  14. PRINCIPAL ACCOUNTANT  FEES AND SERVICES

The ‘‘Item  2—Ratification  of Independent  Registered Public Accounting Firm—Audit and
Non-Audit  Fees’’  section  of  the Company’s Proxy Statement relating to its Annual Meeting of
Shareholders to  be  held May  18,  2017  is  incorporated herein by reference.

PART  IV

Item  15. EXHIBITS  AND  FINANCIAL STATEMENT SCHEDULES

Documents filed as a part of the report:

(1) Financial  Statements.  See  Index  to  Consolidated  Financial  Statements  on  page  151  hereof.

(2) Financial Statement Schedules.  See Index to Consolidated Financial  Statements and Schedules

on page  275 hereof.

(3) Exhibits:

See  Exhibit  Index  on  pages  285 -  289 hereof.

Item 16. FORM  10-K  SUMMARY

None.

272

Pursuant  to  the requirements  of  Section  13  or  15(d) of the Securities Exchange Act of 1934, The

Travelers Companies,  Inc.  has duly caused this report to be signed  on its behalf by  the undersigned,
thereunto duly  authorized.

SIGNATURES

THE TRAVELERS COMPANIES, INC.
(Registrant)

Date: February  16,  2017

By

/s/ KENNETH F. SPENCE III

Kenneth F. Spence III
Executive Vice President and General Counsel
(Authorized Signatory)

Pursuant  to  the requirements  of  the Securities  Exchange  Act of 1934,  this report has been signed

below by  the  following  persons on behalf of The Travelers Companies, Inc.  and in the capacities and  on
the  dates indicated.

By

/s/ ALAN  D.  SCHNITZER

Alan  D. Schnitzer

Director, Chief Executive Officer
(Principal Executive Officer)

Date

February 16,  2017

By

/s/ JAY  S.  BENET

Jay S.  Benet

Vice Chairman and Chief Financial
Officer (Principal Financial Officer)

February 16,  2017

By

/s/ DOUGLAS  K. RUSSELL

Douglas  K. Russell

Senior Vice President and Corporate
Controller (Principal Accounting
Officer)

By

By

By

By

By

By

*

Alan  L. Beller

*

John  H.  Dasburg

*

Janet  M.  Dolan

*

Kenneth  M.  Duberstein

*

Patricia  L.  Higgins

*

Thomas  R. Hodgson

Director

Director

Director

Director

Director

Director

273

February  16,  2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

By

By

By

By

By

By

*

William  J.  Kane

*

Cleve  L.  Killingsworth  Jr.

*

Philip  T. Ruegger III

*

Todd  C.  Schermerhorn

*

Donald  J.  Shepard

*

Laurie  J. Thomsen

Director

Director

Director

Director

Director

Director

*By

/s/ KENNETH  F.  SPENCE  III

Kenneth  F. Spence  III,
Attorney-in-fact

Date

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16, 2017

February 16,  2017

274

INDEX  TO  CONSOLIDATED FINANCIAL STATEMENTS AND  SCHEDULES

Report of  Independent  Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Income  for  the  years ended December  31, 2016, 2015 and  2014 . . . . .
Consolidated  Statement  of Comprehensive  Income for the  years ended December 31, 2016, 2015
and  2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Balance Sheet at December 31,  2016  and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Changes  in  Shareholders’ Equity for the years ended December 31,

2016,  2015 and  2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated  Statement  of Cash Flows  for  the years ended December 31, 2016, 2015 and 2014 . .
Notes  to Consolidated Financial  Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules:
Schedule  II—Condensed  Financial  Information of Registrant  (Parent  Company Only) . . . . . . . . .
Schedule  III—Supplementary  Insurance  Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule  V—Valuation and  Qualifying  Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule  VI—Supplementary  Information Concerning  Property-Casualty  Insurance  Operations . .

Page

152
153

154
155

156
157
158

277
282
283
284

275

Report  of Independent Registered Public  Accounting Firm

The Board of Directors  and Stockholders
The Travelers  Companies,  Inc.:

Under  date  of  February  16,  2017,  we  reported  on the  consolidated balance sheet of  The Travelers

Companies,  Inc. and subsidiaries  (the  Company) as of December 31, 2016  and 2015, 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, 2016, which are included  in
this  Form  10-K.  In  connection  with our  audits  of  the aforementioned consolidated financial statements,
we also  audited  the related financial  statement schedules as listed in the accompanying index.  These
financial statement  schedules are  the  responsibility of the Company’s  management. Our responsibility  is
to express an  opinion  on these financial  statement schedules based  on our audits.

In  our  opinion,  such  financial  statement schedules, when considered in relation to the basic

consolidated financial  statements  taken  as  a whole, present fairly, in all  material respects, the
information set  forth  therein.

/s/ KPMG LLP

KPMG  LLP

New York, New York
February 16, 2017

276

THE TRAVELERS COMPANIES, INC.
(Parent Company  Only)

CONDENSED  FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF INCOME

SCHEDULE  II

For the year ended December 31,

2016

2015

2014

Revenues
Net  investment  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  realized  investment gains  (losses)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Expenses
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss before income  taxes  and  net income of subsidiaries . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income  tax benefit

Loss before net  income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net  income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

13
(1)

12

$

7
1

8

6
3

9

315
5

320

(308)
(168)

(140)
3,154

325
16

341

(333)
(108)

(225)
3,664

321
15

336

(327)
(115)

(212)
3,904

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,014

$3,439

$3,692

(1) The parent company  had  $(1)  million, $0 and $0 of other-than-temporary impairment losses

recognized in  net realized investment  gains  (losses)  during the years ended December 31, 2016,
2015 and  2014,  respectively. The parent company had no other-than-temporary impairment gains
or losses recognized in  other  comprehensive  income (loss) during the years ended December  31,
2016,  2015  and 2014.

The condensed  financial statements should be read  in conjunction with the notes  to the condensed

financial information of the registrant,  as  well as the  consolidated financial statements  and notes
thereto.

See the accompanying  Report of Independent Registered Public Accounting Firm.

277

THE TRAVELERS COMPANIES, INC.
(Parent Company  Only)

CONDENSED  FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF COMPREHENSIVE  INCOME

SCHEDULE  II

For the year ended December 31,

2016

2015

2014

Consolidated  net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,014

$ 3,439

$3,692

Other  comprehensive income  (loss)—parent company:

Changes in net  unrealized gains  on investment securities having  no  credit
losses recognized in  the consolidated  statement of income . . . . . . . . . .
Net  changes in  benefit plan  assets  and obligations . . . . . . . . . . . . . . . . .

Other  comprehensive income  (loss) before  income  taxes  and other

comprehensive  income (loss) of  subsidiaries . . . . . . . . . . . . . . . . . .
Income  tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11
(20)

(9)
(1)

(3)
64

61
21

6
(471)

(465)
(163)

Other  comprehensive income  (loss), net of  taxes, before other

comprehensive  income (loss) of  subsidiaries . . . . . . . . . . . . . . . . . .
Other  comprehensive  income  (loss)  of  subsidiaries . . . . . . . . . . . . . . .

(8)
(590)

40
(1,077)

(302)
372

Consolidated  other  comprehensive income (loss) . . . . . . . . . . . . . . . . .

(598)

(1,037)

70

Consolidated  comprehensive  income . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,416

$ 2,402

$3,762

The condensed  financial statements should be read  in conjunction with the notes  to the condensed

financial information of the registrant,  as  well as the  consolidated financial statements  and notes
thereto.

See the accompanying  Report of Independent Registered Public Accounting Firm.

278

THE TRAVELERS COMPANIES, INC.
(Parent Company  Only)

CONDENSED  FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED  BALANCE  SHEET

SCHEDULE  II

At December 31,

Assets
Fixed  maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term  securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment  in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2016

2015

$

49
155
1,627
27,137
68

$

46
141
1,546
27,573
58

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 29,036

$ 29,364

Liabilities
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,744
82

$ 5,651
127

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,826

5,778

Shareholders’  equity
Common stock  (1,750.0  shares  authorized,  279.6 and 295.9 shares  issued and

outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained  earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost  (489.5  and 467.6  shares) . . . . . . . . . . . . . . . . . . . . . . . . .

22,614
32,185
(755)
(30,834)

22,172
29,933
(157)
(28,362)

Total shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,210

23,586

Total liabilities  and  shareholders’  equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 29,036

$ 29,364

The condensed  financial statements should be read  in conjunction with the notes  to the condensed

financial information of the registrant,  as  well as the  consolidated financial statements  and notes
thereto.

See the accompanying  Report of Independent Registered Public Accounting Firm.

279

THE TRAVELERS COMPANIES, INC.
(Parent Company  Only)

CONDENSED  FINANCIAL INFORMATION OF REGISTRANT
(in millions)

CONDENSED STATEMENT OF CASH FLOWS

SCHEDULE  II

For the year ended December 31,

2016

2015

2014

Cash flows from  operating  activities
Net  income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments  to reconcile net income  to  net cash  provided  by operating

activities:
Equity in  net  income  of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends  received from consolidated  subsidiaries . . . . . . . . . . . . . . . .
Capital received  from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred federal income  tax expense  (benefit) . . . . . . . . . . . . . . . . . . .
Change in income  taxes  payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,014

$ 3,439

$ 3,692

(3,154)
2,998
—
12
(48)
73

(3,664)
3,833
3
(6)
51
113

(3,904)
4,071
—
51
(87)
(13)

Net cash provided by  operating  activities . . . . . . . . . . . . . . . . . . . . . . .

2,895

3,769

3,810

Cash flows from  investing activities
Net  purchases  of  short-term  securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other  investments,  net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used in  investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash flows from  financing activities
Treasury stock  acquired—share  repurchase authorization . . . . . . . . . . . . .
Treasury stock  acquired—net  employee  share-based compensation . . . . . .
Dividends  paid to shareholders
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment  of  debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common  stock—employee  share options . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(81)
(8)

(89)

(16)
(20)

(36)

(7)
5

(2)

(2,400)
(72)
(757)
(400)
491
332
—

(3,150)
(74)
(739)
(400)
392
183
55

(3,275)
(57)
(729)
—
—
195
57

Net cash used in  financing activities . . . . . . . . . . . . . . . . . . . . . . . . . .

(2,806)

(3,733)

(3,809)

Net  decrease  in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash  at beginning of  year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash at  end  of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental  disclosure  of  cash flow information
Cash  received  during  the year for taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash  paid during  the  year for  interest . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
2

2

132
311

—
2

2

209
318

$

$
$

(1)
3

2

136
318

$

$
$

$

$
$

The condensed  financial statements should be read  in conjunction with the notes  to the condensed

financial information of the registrant,  as  well as the  consolidated financial statements  and notes
thereto.

See the accompanying  Report of Independent Registered Public Accounting Firm.

280

THE TRAVELERS COMPANIES, INC.
(Parent Company  Only)

NOTES  TO  THE  CONDENSED FINANCIAL  INFORMATION  OF  REGISTRANT

SCHEDULE  II

1. GUARANTEES

The Travelers  Companies,  Inc.  (TRV) fully and unconditionally guarantees the  payment of all
principal, premiums, if  any,  and  interest  on  certain debt obligations of its subsidiaries TPC and TIGHI.
The guarantees pertain  to the  $200  million 7.75% notes due 2026 and the $500 million 6.375% notes
due 2033.

TRV  also  has contingent  obligations for guarantees in connection with  the selling of businesses  to
third  parties  and  various indemnifications including indemnifications to service providers in the normal
course of  business. The guarantees and  indemnification clauses are often standard  contractual terms
and  include  indemnifications for  breaches of representations and warranties and in some cases
obligations  arising from certain liabilities. The terms of these provisions vary in  duration and nature.
Certain  of  the guarantees and indemnifications described above have no stated or notional  amounts or
limitation to  the  maximum  potential  future payments,  and,  accordingly, TRV is unable to provide  an
estimate of the  maximum  potential  payments for such arrangements.

281

THE TRAVELERS  COMPANIES, INC. AND SUBSIDIARIES
Supplementary Insurance Information
2014-2016
(in millions)

Claims and
Claim
Adjustment
Expense
Reserves

Deferred
Acquisition
Costs

Unearned
Premiums Premiums

Earned

Net

Claims and Amortization
of  Deferred
Claim
Investment Adjustment Acquisition
Expenses
Income(1)

Costs

Segment

2016
Business and International Insurance . . . . . . . . . . . . . .
Bond & Specialty Insurance . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .

Total—Reportable Segments . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,093
232
598

1,923
—

$41,006
2,944
3,979

47,929
20

$ 7,134
1,308
3,887

12,329
—

$14,620
2,088
7,826

24,534
—

$1,763
210
329

2,302
—

$ 9,190
572
5,308

15,070
—

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,923

$47,949

$12,329

$24,534

$2,302

$15,070

2
8
2

2015
Business and International Insurance . . . . . . . . . . . . . .
Bond & Specialty Insurance . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .

Total—Reportable Segments . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,072
225
552

1,849
—

$41,563
3,157
3,552

48,272
23

$ 7,147
1,292
3,532

11,971
—

$14,521
2,085
7,268

23,874
—

$1,824
223
332

2,379
—

$ 8,859
643
4,221

13,723
—

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,849

$48,295

$11,971

$23,874

$2,379

$13,723

2014
Business and International Insurance . . . . . . . . . . . . . .
Bond & Specialty Insurance . . . . . . . . . . . . . . . . . . . .
Personal Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .

Total—Reportable Segments . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,080
222
533

1,835
—

$42,700
3,435
3,689

49,824
26

$ 7,208
1,286
3,345

11,839
—

$14,512
2,076
7,125

23,713
—

$2,156
252
379

2,787
—

$ 9,145
481
4,244

13,870
—

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,835

$49,850

$11,839

$23,713

$2,787

$13,870

$2,358
397
1,230

3,985
—

$3,985

$2,329
393
1,163

3,885
—

$3,885

$2,321
388
1,173

3,882
—

$3,882

SCHEDULE  III

Other

Net

Operating Written
Expenses(2) Premiums

$2,746
389
988

4,123
394

$14,675
2,099
8,184

24,958
—

$4,517

$24,958

$2,686
389
988

4,063
404

$14,583
2,081
7,457

24,121
—

$4,467

$24,121

$2,541
403
989

3,933
400

$14,636
2,103
7,165

23,904
—

$4,333

$23,904

(1)

See note 2 of notes to the consolidated  financial statements for discussion of the method used  to  allocate  net  investment  income and  invested  assets to  the identified
segments.

(2) Expense allocations are determined in  accordance  with  prescribed statutory  accounting practices. These practices make a  reasonable allocation of  all  expenses to  those

product lines with which they are associated.

See the accompanying Report of Independent Registered Public  Accounting  Firm.

THE TRAVELERS  COMPANIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in millions)

SCHEDULE  V

2016
Reinsurance  recoverables . . . . . . . . . . . . . .
Allowance  for  uncollectible:

Premiums receivable  from  underwriting

activities . . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

2015
Reinsurance  recoverables . . . . . . . . . . . . . .
Allowance  for  uncollectible:

Premiums receivable  from  underwriting

activities . . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

2014
Reinsurance  recoverables . . . . . . . . . . . . . .
Allowance  for  uncollectible:

Premiums receivable  from  underwriting

activities . . . . . . . . . . . . . . . . . . . . . . .
Deductibles . . . . . . . . . . . . . . . . . . . . . .

(1) Credited  to  the  related  asset  account.

Balance at
beginning of
period

Charged to
costs and
expenses

Charged  to
other
accounts

Deductions(1)

Balance
at  end  of
period

$157

$—

$—

$41

$116

$ 65
$ 35

$203

$ 70
$ 36

$239

$ 75
$ 39

$35
$ 5

$—

$38
$ 3

$—

$44
$—

$—
$—

$—

$—
$—

$—

$—
$—

$39
$ 6

$46

$43
$ 4

$36

$49
$ 3

$ 61
$ 34

$157

$ 65
$ 35

$203

$ 70
$ 36

See the accompanying  Report of Independent Registered Public Accounting Firm.

283

THE TRAVELERS  COMPANIES, INC. AND SUBSIDIARIES
Supplementary Information Concerning  Property-Casualty Insurance Operations(1)
2014-2016
(in millions)

SCHEDULE  VI

2
8
4

Affiliation with Registrant(2)

Deferred

Claims and

Acquisition Claim Adjustment
Expense Reserves

Costs

Discount From
Reserves for
Unpaid
Claims(3)

Claims  and
Claim
Adjustment
Expenses
Incurred
Related  to:

Net

Amortization
of Deferred

Paid
Claims
and
Claim

Net

Unearned
Premiums Premiums

Earned

Investment Current Prior Acquisition Adjustment Written

Income

Year

Year

Costs

Expenses

Premiums

2016 . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . .

$1,923
$1,849
$1,835

$47,929
$48,272
$49,824

$1,083
$1,066
$1,080

$12,329
$11,971
$11,839

$24,534
$23,874
$23,713

$2,302
$2,379
$2,787

$15,675 $(680)
$14,471 $(817)
$14,688 $(885)

$3,985
$3,885
$3,882

$14,796
$14,474
$14,066

$24,958
$24,121
$23,904

(1) Excludes accident and health insurance business.

(2) Consolidated property-casualty insurance operations.

(3) For a discussion of types of reserves  discounted and  discount rates used, see note 7 of notes to the consolidated  financial statements.

See the accompanying Report of Independent Registered Public  Accounting  Firm.

Exhibit
Number

EXHIBIT  INDEX

Description  of Exhibit

3.1 Amended and  Restated  Articles  of  Incorporation  of  The Travelers Companies, Inc. (the

‘‘Company’’),  as amended  and restated  May  23, 2013, were  filed  as Exhibit  3.1  to the
Company’s  current  report  on  Form 8-K filed  on May 24, 2013,  and are incorporated  herein  by
reference.

3.2

Bylaws of The Travelers Companies, Inc. as  Amended and Restated  November 3, 2016 were
filed  as  Exhibit  3.2  to  the Company’s current  report  on Form 8-K filed on  November  9, 2016,
and are  incorporated  herein  by reference.

10.1 Revolving  Credit  Agreement,  dated  June  7, 2013,  between the  Company  and a  syndicate  of
financial institutions, was  filed  as Exhibit  10.1 to  the Company’s quarterly  report on
Form  10-Q for the  fiscal quarter ended June  30,  2013, and  is  incorporated  herein  by
reference.

10.2* The Travelers Companies, Inc.  Policy Regarding  Executive  Incentive  Compensation

Recoupment was  filed as  Exhibit  10.42 to the  Company’s annual report on  Form 10-K  for  the
fiscal  year  ended December 31,  2009, and  is  incorporated herein by  reference.

10.3* Letter  Agreement  between  Alan  D. Schnitzer and the Company,  dated  April 15, 2007,  was
filed  as  Exhibit  10.1  to  the Company’s quarterly report on  Form 10-Q for  the  fiscal quarter
ended  June 30, 2007,  and  is  incorporated  herein by reference.

10.4* Letter  Agreement  between  Alan  D. Schnitzer and the Company,  dated  August  4,  2015, was
filed  as  Exhibit  10.2  to  the Company’s quarterly report on  Form 10-Q for  the  fiscal quarter
ended  September 30, 2015,  and is incorporated herein  by  reference.

10.5* Time  Sharing  Agreement,  dated September 2, 2015, by  and  between  the Company  and  Alan
D. Schnitzer,  was filed  as  Exhibit 10.3  to the  Company’s quarterly report on  Form 10-Q  for
the fiscal  quarter  ended September 30, 2015,  and is incorporated  herein  by  reference.

10.6* Amended and  Restated Employment Agreement between  the  Company and  Jay S.  Fishman,

dated  as  of  December 19, 2008, was filed as  Exhibit  10.27 to the  Company’s  annual  report on
Form  10-K  for  the  fiscal  year  ended December 31, 2008,  and  is  incorporated  herein  by
reference.

10.7* Letter  regarding  Amended and Restated Employment  Agreement  between the  Company  and
Jay S.  Fishman,  dated as of March 24, 2014,  was filed as Exhibit  10.1  to  the  Company’s
quarterly report on  Form  10-Q  for  the fiscal quarter ended March  31,  2014, and  is
incorporated  herein by  reference.

10.8* Letter regarding  Amended and Restated Employment  Agreement  between the  Company  and

Jay S. Fishman,  dated August 4, 2015, was  filed  as Exhibit 10.1 to the Company’s  quarterly
report on Form  10-Q  for  the fiscal quarter ended September 30, 2015,  and  is incorporated
herein  by  reference.

10.9* Letter regarding  Amended and Restated Employment  Agreement  between the  Company  and

Jay S. Fishman,  dated March 28, 2016, was  filed  as Exhibit  10.1 to  the Company’s quarterly
report on Form  10-Q  for  the quarter ended  March 31, 2016,  and is incorporated herein  by
reference.

285

Exhibit
Number

Description  of Exhibit

10.10* Amended  and Restated  Time  Sharing Agreement, effective August 3, 2010, by and  between

the  Company  and  Jay  S.  Fishman, was filed as Exhibit 10.1 to  the Company’s quarterly report
on Form  10-Q for the  fiscal quarter ended September  30, 2010, and is  incorporated herein  by
reference.

10.11* The  Travelers  Companies,  Inc.  Amended and Restated 2014 Stock Incentive Plan was filed as

Exhibit  10.1  to  the  Company’s  current report on  Form 8-K filed on May 19, 2016, and is
incorporated herein by  reference.

10.12* The  Travelers  Companies,  Inc.  Amended and Restated 2004 Stock Incentive Plan was filed as
Exhibit  10.28 to  the  Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2008,  and  is  incorporated herein by reference.

10.13* Amendment  to  The  Travelers  Companies,  Inc. Amended and Restated 2004 Stock Incentive

Plan  was filed  as  Exhibit  10.7  to the Company’s annual report on Form 10-K for the fiscal
year  ended December  31,  2012, and is incorporated herein by reference.

10.14* TPC 2002 Stock Incentive Plan, as amended effective January 23, 2003, was filed as

Exhibit  10.22 to  TPC’s  annual  report on Form 10-K for the fiscal year ended December 31,
2002, and is  incorporated herein by reference.

10.15* Amendment  to  the TPC  2002  Stock Incentive Plan, as amended effective January  23, 2003,
was  filed  as  Exhibit  10.9  to  the  Company’s annual  report on Form 10-K for the fiscal year
ended December 31,  2012, and  is incorporated herein  by reference.

10.16* The  St. Paul  Companies,  Inc.  (‘‘SPC’’) Amended and Restated 1994  Stock  Incentive Plan was
filed  as  Exhibit 10(f) to the  Company’s  annual report on Form 10-K for the fiscal year ended
December  31,  2001,  and  is  incorporated herein by reference.

10.17* Amendment  to  the SPC  Amended and Restated  1994  Stock Incentive Plan was filed as

Exhibit  10.11 to  the  Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2012,  and  is  incorporated herein by reference.

10.18* Current  Director Compensation Program, effective  as of May 19, 2016, was filed as

Exhibit  10.2  to  the  Company’s  quarterly report on  Form 10-Q for the fiscal quarter ended
June 30, 2016,  and is  incorporated herein by  reference.

10.19* The  Company’s Amended  and  Restated Deferred Compensation Plan for Non-Employee

Directors  was filed  as  Exhibit  10.29 to the  Company’s annual report on Form 10-K for  the
fiscal  year  ended December  31, 2008, and is incorporated herein by reference.

10.20* TPC Compensation  Plan  for  Non-Employee Directors, as amended on January 22, 2004, was
filed as Exhibit 10.16 to TPC’s  annual report on Form 10-K for the  fiscal year ended
December  31,  2003, and  is  incorporated herein by reference.

10.21* The  SPC Directors’ Deferred  Compensation Plan was filed as Exhibit 10(b) to  the Company’s
annual  report  on  Form  10-K  for the fiscal year ended December  31, 1997, and is incorporated
herein by  reference.

10.22* The  SPC Deferred Stock  Plan  for Non-Employee Directors was filed as Exhibit  10(a) to the
Company’s annual  report on Form 10-K for the fiscal year ended December  31, 2000, and is
incorporated herein by reference.

10.23* The  SPC Directors’ Charitable  Award Program, as amended, was filed as Exhibit 10(d) to the

Company’s annual  report on Form 10-K for the fiscal year ended December  31, 2000, and is
incorporated herein by reference.

286

Exhibit
Number

Description  of Exhibit

10.24* The  Travelers  Severance  Plan  (as Amended and Restated,  effective January 1, 2015) was filed

as Exhibit  10.20 to  the  Company’s annual report on Form 10-K  for  the fiscal year ended
December  31,  2014,  and  is  incorporated herein by reference.

10.25* The  Company’s Senior  Executive Performance Plan was filed  as Exhibit  10.1 to the Company’s

quarterly  report on Form  10-Q  for the fiscal quarter ended March 31, 2005, and is
incorporated herein by  reference.

10.26* First  Amendment  to  the Company’s Senior Executive Performance Plan was  filed as

Exhibit  10.40 to  the  Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2009,  and  is  incorporated herein by reference.

10.27* The  Travelers  Deferred  Compensation Plan, as Amended and Restated, effective January  1,
2009, was filed  as  Exhibit  99.1  to the Company’s Registration Statement on Form S-8
(Registration No. 333-157091)  dated  February 4, 2009, and  is  incorporated herein  by
reference.

10.28* First Amendment to The Travelers Deferred Compensation Plan was filed as Exhibit 10.37  to
the  Company’s  annual  report on Form 10-K for the fiscal year ended December 31, 2009,  and
is incorporated herein by  reference.

10.29* TPC Deferred  Compensation  Plan was filed as Exhibit 10.23 to TPC’s annual report on
Form 10-K for the  fiscal year  ended December 31, 2002, and is incorporated herein by
reference.

10.30* The  Travelers  Benefit  Equalization Plan, as Amended and Restated effective as of January 1,
2016, was filed  as  Exhibit  10.29 to the Company’s annual  report on Form 10-K for the fiscal
year  ended December  31,  2015, and is incorporated herein by reference.

10.31* TPC Benefit Equalization  Plan  was filed as Exhibit 10.24 to  TPC’s annual report on

Form 10-K for the  fiscal year  ended December 31, 2002, and is incorporated herein by
reference.

10.32* The  SPC Benefit Equalization  Plan—2001 Revision and the first and second amendments
thereto  were filed  as  Exhibit  10.27 to  the Company’s annual report on Form 10-K for the
fiscal  year  ended December  31, 2004, and are incorporated herein by reference.

10.33* The  SPC Annual Incentive  Plan was filed as an exhibit to SPC’s Definitive Proxy Statement
on Schedule 14A,  filed  on  March 29, 1999, and is incorporated herein by reference.

10.34* Form  of  Non-Competition Agreement was filed  as Exhibit 10.43  to the Company’s annual

report on Form  10-K  for  the fiscal year ended December 31, 2009, and is incorporated herein
by  reference.

10.35†* Form of  Non-Solicitation and  Non-Disclosure Agreement for Executive Officers  is filed

herewith.

10.36* Form of  Restricted Stock  Unit  Award  Notification and Agreement (For Management

Committee Member  Executing  Non-Compete) was filed as Exhibit 10.37 to the  Company’s
annual  report  on  Form  10-K  for the fiscal year ended December  31, 2014, and is incorporated
herein by  reference.

10.37†* Form of  Stock  Option  Grant  Notification and Agreement is filed herewith.

10.38†* Form of  Restricted Stock  Unit  Award  Notification and Agreement is filed herewith.

287

Exhibit
Number

Description  of Exhibit

10.39* Form  of  Performance  Shares  Award Notification  and Agreement (2014)  was filed as

Exhibit  10.47 to  the  Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2013,  and  is  incorporated herein by reference.

10.40* Form  of  Performance  Shares  Award Notification  and Agreement for Jay S. Fishman (2014)
was  filed  as  Exhibit  10.48 to  the Company’s annual report on Form 10-K for the fiscal year
ended December 31,  2013, and  is incorporated herein  by reference.

10.41* Form  of  Performance  Shares  Award Notification  and Agreement (2015)  was filed as

Exhibit  10.46 to  the  Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2014,  and  is  incorporated herein by reference.

10.42* Form  of  Performance  Shares  Award Notification  and Agreement for Jay S. Fishman (2015)
was  filed  as  Exhibit  10.47 to  the Company’s annual report on Form 10-K for the fiscal year
ended December 31,  2014, and  is incorporated herein  by reference.

10.43* Form  of  Performance  Shares  Award Notification  and Agreement (2016)  was filed as

Exhibit 10.44 to the Company’s annual report on Form 10-K for the fiscal year ended
December  31,  2015,  and  is  incorporated herein by reference.

10.44* Form  of  Performance  Shares  Award Notification  and Agreement for Jay S. Fishman (2016)
was  filed  as  Exhibit  10.45 to  the Company’s annual report on Form 10-K for the fiscal year
ended December 31,  2015, and  is incorporated herein  by reference.

10.45†* Form  of  Performance  Shares  Award Notification  and Agreement (2017)  is filed  herewith.

10.46†* Form  of  Non-Employee  Director Notification  and Agreement of Annual Deferred Stock

Award  is  filed  herewith.

10.47* Form  of  Restricted Stock  Unit  Award  Notification and Agreement for Brian W. MacLean was
filed  as  Exhibit 10.47 to  the  Company’s  annual report on Form 10-K for the fiscal year ended
December  31,  2015,  and  is  incorporated herein by reference.

10.48* Separation  Agreement,  dated  June 2, 2016, between  The Travelers Indemnity Company and
Doreen  Spadorcia was filed  as  Exhibit 10.3 to the Company’s quarterly report on Form 10-Q
for the fiscal  quarter  ended June 30, 2016, and is incorporated herein by  reference.

10.49†* Letter  Agreement  between  Avrohom J. Kess and the Company, dated  December 19, 2016,  is

filed  herewith.

12.1† Statement regarding  the  computation of the ratio  of earnings  to fixed charges and the ratio of

earnings  to combined  fixed charges and preferred stock dividends is filed  herewith.

21.1† A list of  the subsidiaries of the  Company  is  filed  herewith.

23.1† Consent  of KPMG LLP, Independent Registered Public Accounting Firm, with respect to the
incorporation by  reference of KPMG LLP’s audit report into Registration Statements of  the
Company on Form  S-8  (SEC File No. 33-56987, No. 333-25203, No.  333-50943, No. 333-63114,
No.  333-63118,  No.  333-65726,  No. 333-107698, No. 333-107699, No. 333-114135,
No.  333-117726, No.  333-120998, No. 333-128026, No. 333-157091,  No. 333-157092,
No.  333-164972, No.  333-176002, No. 333-196290  and No. 333-212078) and Form S-3 (SEC
File  No.  333-212077)  is  filed herewith.

24.1† Power  of  Attorney  is  filed herewith.

31.1† Certification of  Alan D. Schnitzer,  Chief  Executive  Officer  of the Company, as required by

Section  302 of  the Sarbanes-Oxley Act  of  2002  is  filed  herewith.

288

Exhibit
Number

Description  of Exhibit

31.2† Certification of  Jay S.  Benet,  Vice Chairman  and Chief Financial Officer of the  Company, as

required  by  Section 302  of the  Sarbanes-Oxley Act of 2002 is filed herewith.

32.1† Certification of  Alan  D.  Schnitzer,  Chief  Executive  Officer  of the Company, as required  by

Section  906 of  the  Sarbanes-Oxley Act  of  2002  is  filed  herewith.

32.2† Certification of  Jay S.  Benet,  Vice Chairman  and Chief Financial Officer of the  Company, as

required  by  Section 906  of the  Sarbanes-Oxley Act of 2002 is filed herewith.

101.1† The  following  financial information  from  The Travelers Companies, Inc.’s Annual Report on

Form  10-K  for the year  ended  December 31,  2016  formatted in XBRL: (i)  Consolidated
Statement of  Income for  the years ended  December  31, 2016, 2015 and 2014;
(ii)  Consolidated  Statement  of  Comprehensive Income  for  the years ended December 31,
2016,  2015  and 2014;  (iii) Consolidated Balance Sheet  at December  31, 2016 and 2015;
(iv)  Consolidated  Statement  of Changes in  Shareholders’  Equity  for  the years ended
December 31, 2016,  2015 and 2014; (v)  Consolidated  Statement of Cash Flows for the years
ended  December 31,  2016,  2015  and 2014;  (vi) Notes  to  Consolidated Financial  Statements;
and (vii)  Financial  Statement  Schedules.

†

Filed herewith.

* Management  contract  or compensatory plan in which directors and/or  executive officers are eligible

to participate.

The total amount  of  securities authorized pursuant to any instrument defining  rights of holders  of

long-term debt of  the Company does  not exceed 10% of the total assets of the Company and its
consolidated subsidiaries. Therefore,  the  Company is not filing any instruments evidencing long-term
debt. However,  the  Company  will  furnish copies of any such instrument to the Securities and  Exchange
Commission upon request.

Copies of any  of  the  exhibits referred to above will be  furnished to security holders  who make

written  request  therefor  to The  Travelers Companies, Inc., 385 Washington  Street, Saint Paul,
MN, 55102, Attention: Corporate  Secretary.

The agreements  and other  documents  filed as exhibits to  this report are not  intended to provide

factual information or  other  disclosure  other  than the  terms of the agreements or other documents
themselves, and  you should  not  rely  on  them for that  purpose. In particular, any representations and
warranties  made  by the Company in  these agreements or other documents were made solely  within  the
specific  context  of  the  relevant  agreement or document  and may not  describe the actual state of affairs
at the date they were  made  or  at any  other time.

289

THE TRAVELERS  COMPANIES, INC.  AND SUBSIDIARIES
COMPUTATION  OF RATIO OF EARNINGS TO FIXED CHARGES

Exhibit  12.1

(for the year ended December 31, in  millions,
except ratios)

2016

2015

2014

2013

2012

Income  before  income taxes . . . . . . . . . . . . . . . . . . . . . .
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of rentals deemed to  be interest . . . . . . . . . . . . . .

$4,053
363
65

$4,740
373
66

$5,089
369
71

$4,945
361
64

$3,166
378
64

Income  available for  fixed charges . . . . . . . . . . . . . . . . . .

$4,481

$5,179

$5,529

$5,370

$3,608

Fixed  charges:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of rentals deemed to  be interest . . . . . . . . . . . .

$ 363
65

$ 373
66

$ 369
71

$ 361
64

$ 378
64

Total fixed  charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 428

$ 439

$ 440

$ 425

$ 442

Ratio of  earnings  to fixed  charges . . . . . . . . . . . . . . . . . .

10.48

11.78

12.57

12.63

8.17

The ratio of  earnings  to fixed charges  is  computed by  dividing income available for fixed charges
by  the total  fixed  charges.  For purposes  of  this ratio, fixed  charges consist  of interest and that  portion
of  rentals deemed representative  of the  appropriate interest factor.

290

Exhibit  31.1

I,  Alan  D.  Schnitzer,  certify that:

CERTIFICATION

1.

I have reviewed this Annual Report on Form  10-K  for the  year  ended  December  31, 2016 of The
Travelers Companies, Inc. (the  Company);

2. Based on my  knowledge, this  report  does not  contain  any  untrue  statement of  a material  fact or

omit to  state  a  material  fact  necessary  to make the  statements made,  in  light  of the  circumstances
under  which  such  statements  were  made, not  misleading with  respect to  the  period  covered  by this
report;

3. Based on my  knowledge, the financial statements, and  other  financial information  included in  this
report,  fairly  present  in  all material  respects the financial condition,  results  of  operations and cash
flows of the Company  as of, and  for, the  periods presented in  this report;

4. The  Company’s  other certifying  officer and I are responsible for  establishing  and maintaining

disclosure controls  and  procedures  (as defined in Exchange Act Rules  13a-15(e)  and  15d-15(e))
and  internal control  over financial reporting (as defined  in Exchange  Act  Rules 13a-15(f) and
15d-15(f)) for  the Company  and have:

a)

designed  such  disclosure controls and procedures, or caused  such  disclosure  controls and
procedures  to  be designed  under our supervision, to  ensure  that  material  information relating
to the  Company,  including  its  consolidated  subsidiaries, is made  known to us by  others  within
those  entities, particularly  during the period  in which  this  report  is  being  prepared;

b) designed  such  internal  control  over  financial reporting, or caused  such  internal  control  over

financial reporting to be  designed under  our  supervision,  to  provide  reasonable  assurance
regarding  the  reliability of  financial reporting and the preparation of financial  statements  for
external  purposes  in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness  of the  Company’s disclosure controls and  procedures and
presented in this report  our  conclusions about the effectiveness  of  the  disclosure  controls  and
procedures,  as  of  the  end  of  the period  covered by this  report  based on such evaluation;  and

d) disclosed  in  this report  any  change in the Company’s  internal control over  financial  reporting

that  occurred during  the Company’s  most  recent fiscal quarter (the  Company’s fourth fiscal
quarter  in  the case of an  annual report) that has materially  affected, or is  reasonably likely  to
materially  affect,  the Company’s internal control over  financial reporting; and

5. The  Company’s  other certifying  officer and I have disclosed, based  on  our most  recent  evaluation
of  internal control  over financial  reporting, to the Company’s  auditors and the  audit  committee  of
the  Company’s  Board  of  Directors (or persons performing  the equivalent  functions):

a)

b)

all  significant deficiencies and material weaknesses  in the  design or operation of  internal
control over financial  reporting  which are reasonably likely to  adversely  affect the  Company’s
ability to record, process,  summarize and report financial information; and

any fraud,  whether or not material, that  involves  management  or  other  employees  who  have a
significant role in  the Company’s internal control over financial  reporting.

Date: February 16, 2017

By:

/s/ ALAN D. SCHNITZER

Alan D. Schnitzer
Chief Executive Officer

291

Exhibit  31.2

I,  Jay  S.  Benet, certify  that:

CERTIFICATION

1.

I have reviewed this Annual Report on Form  10-K  for the  year  ended  December  31, 2016 of The
Travelers Companies, Inc. (the  Company);

2. Based on my  knowledge, this  report  does not  contain  any  untrue  statement of  a material  fact or

omit to  state  a  material  fact  necessary  to make the  statements made,  in  light  of the  circumstances
under  which  such  statements  were  made, not  misleading with  respect to  the  period  covered  by this
report;

3. Based on my  knowledge, the financial statements, and  other  financial information  included in  this
report,  fairly  present  in  all material  respects the financial condition,  results  of  operations and cash
flows of the Company  as of, and  for, the  periods presented in  this report;

4. The  Company’s  other certifying  officer and I are responsible for  establishing  and maintaining

disclosure controls  and  procedures  (as defined in Exchange Act Rules  13a-15(e)  and  15d-15(e))
and  internal control  over financial reporting (as defined  in Exchange  Act  Rules 13a-15(f) and
15d-15(f)) for  the Company  and have:

a)

designed  such  disclosure controls and procedures, or caused  such  disclosure  controls and
procedures  to  be designed  under our supervision, to  ensure  that  material  information relating
to the  Company,  including  its  consolidated  subsidiaries, is made  known to us by  others  within
those  entities, particularly  during the period  in which  this  report  is  being  prepared;

b) designed  such  internal  control  over  financial reporting, or caused  such  internal  control  over

financial reporting to be  designed under  our  supervision,  to  provide  reasonable  assurance
regarding  the  reliability of  financial reporting and the preparation of financial  statements  for
external  purposes  in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness  of the  Company’s disclosure controls and  procedures and
presented in this report  our  conclusions about the effectiveness  of  the  disclosure  controls  and
procedures,  as  of  the  end  of  the period  covered by this  report  based on such evaluation;  and

d) disclosed  in  this report  any  change in the Company’s  internal control over  financial  reporting

that  occurred during  the Company’s  most  recent fiscal quarter (the  Company’s fourth fiscal
quarter  in  the case of an  annual report) that has materially  affected, or is  reasonably likely  to
materially  affect,  the Company’s internal control over  financial reporting; and

5. The  Company’s  other certifying  officer and I have disclosed, based  on  our most  recent  evaluation
of  internal control  over financial  reporting, to the Company’s  auditors and the  audit  committee  of
the  Company’s  Board  of  Directors (or persons performing  the equivalent  functions):

a)

b)

all  significant deficiencies and material weaknesses  in the  design or operation of  internal
control over financial  reporting  which are reasonably likely to  adversely  affect the  Company’s
ability to record, process,  summarize and report financial information; and

any fraud,  whether or not material, that  involves  management  or  other  employees  who  have a
significant role in  the Company’s internal control over financial  reporting.

Date: February 16, 2017

By:

/s/ JAY S. BENET

Jay S. Benet
Vice Chairman and Chief Financial Officer

292

Exhibit  32.1

THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT  TO 18 U.S.C. SECTION 1350, AS  ADOPTED
PURSUANT  TO SECTION 906 OF THE SARBANES-OXLEY  ACT OF 2002

Pursuant  to Rule  13a-14(b) of  the  Securities Exchange  Act of 1934 (the ‘‘Exchange Act’’) and 18
U.S.C.  Section 1350,  the undersigned  officer of The Travelers  Companies, Inc. (the  ‘‘Company’’)  hereby
certifies  that  the  Company’s  Annual  Report on Form 10-K for  the  year  ended December  31,  2016  (the
‘‘Report’’) fully  complies  with the requirements of Section 13(a)  or  15(d)  of  the Exchange Act  and  that
the  information contained in  the Report  fairly presents,  in  all material respects,  the financial  condition
and  results of operations  of  the  Company.

Date: February 16, 2017

By:

/s/ ALAN D. SCHNITZER

Name: Alan D. Schnitzer
Title: Chief Executive Officer

293

Exhibit  32.2

THE TRAVELERS COMPANIES, INC.
CERTIFICATION OF CHIEF FINANCIAL  OFFICER
PURSUANT  TO 18 U.S.C. SECTION 1350, AS  ADOPTED
PURSUANT  TO SECTION 906 OF THE SARBANES-OXLEY  ACT OF 2002

Pursuant  to Rule  13a-14(b) of  the  Securities Exchange  Act of 1934 (the ‘‘Exchange Act’’) and
18 U.S.C. Section 1350,  the undersigned  officer of  The Travelers Companies,  Inc.  (the ‘‘Company’’)
hereby  certifies  that  the  Company’s  Annual  Report on  Form  10-K  for the  year ended  December 31,
2016 (the ‘‘Report’’) fully  complies  with  the requirements of Section 13(a) or  15(d) of  the Exchange
Act and that  the information  contained  in  the Report fairly  presents,  in  all  material respects,  the
financial condition  and  results  of  operations of the Company.

Date: February 16, 2017

By:

/s/ JAY S. BENET

Name: Jay S. Benet
Title: Vice Chairman and Chief Financial
Officer

294

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(This  page Intentionally left blank)

Shareholders’ Information

Your dividends
The Travelers Companies, Inc. has paid cash dividends 
without interruption for 145 years. Our most recent 
quarterly dividend of $0.67 per share was declared on 
January 24, 2017, payable March 31, 2017, to shareholders 
of record as of March 10, 2017.

Automatic dividend reinvestment program
This program provides a convenient opportunity for our 
shareholders to increase their holding of Travelers common 
stock. An explanatory brochure and enrollment card may 
be obtained by calling our stock transfer agent, Wells Fargo 
Bank, N.A., at 888.326.5102, or by mailing a request to the 
address below.

Stock transfer agent and registrar
For address changes, dividend checks, direct deposits of 
dividends, account consolidations, registration changes, 
lost stock certiﬁ cates and general stock holding questions, 
please contact:

Wells Fargo Bank, N.A. 
Shareowner Services 
P.O. Box 64854 
Saint Paul, MN 55164-0854 

Toll Free: 888.326.5102
Outside U.S. and Canada: 651.450.4064
shareowneronline.com

Financial information available
Travelers makes available, free of charge on its website, 
all of its ﬁ lings that are made electronically to the SEC, 
including Forms 10-K, 10-Q and 8-K. To access these 
ﬁ lings, go to travelers.com > For Investors > 
Financial Information > SEC Filings.

Requests for additional information may be directed to:
The Travelers Companies, Inc.
485 Lexington Avenue
New York, NY 10017-2630
Investor Relations, NY08EX 
Attn: Gabriella Nawi

917.778.6844
ShareholderRelations@travelers.com

Annual Meeting of Shareholders
The Annual Meeting of Shareholders will be held on 
May 18, 2017, at The Hartford Marriott Downtown, 
200 Columbus Boulevard, Hartford, CT 06103-2807. 
Commencing March 31, we plan to send proxy materials, 
or a notice of internet availability of proxy materials, to 
shareholders of record as of the close of business on 
March 21, 2017. The notice will provide instructions on 
where to access our Proxy Statement and Annual Report as 
well as how to vote your shares electronically. The notice 
also includes instructions on how to request a printed copy 
of our proxy materials.

Stock price and dividend rate
The Travelers Companies, Inc. common stock is listed on 
the New York Stock Exchange (NYSE) and is publicly traded 
under the ticker symbol “TRV”.

The following tables set forth the quarterly high and low 
closing sales prices of The Travelers Companies, Inc. 
common stock, as well as the amount of quarterly cash 
dividends declared per share for years 2016 and 2015.

2016 

High 

Low 

First Quarter 

$117.43 

$102.08 

Second Quarter  119.04 

108.79 

Third Quarter 

119.29 

113.71 

Fourth Quarter  122.57 

104.67 

2015 

High 

Low 

First Quarter 

$109.73 

$102.82 

Second Quarter  108.67 

Third Quarter 

107.82 

Fourth Quarter  115.83 

96.14 

97.49 

98.34 

 Cash Dividend
Declared

$0.61

0.67

0.67

0.67

 Cash Dividend 
Declared

$0.55

0.61

0.61

0.61

 
 
 
 
 
 
 
 
Additional information
We have included the tables below to provide a reconciliation of the following items used in this Annual Report: (i) net income 
to operating income, (ii) shareholders’ equity to adjusted shareholders’ equity, which are components of the return on equity 
and operating return on equity ratios and (iii) a calculation of return on equity and operating return on equity. 

For the year ended December 31, 

(Dollars in millions, after-tax) 

2016 

2015 

2014 

2013 

2012 

Reconciliation of net income to operating income

Net income 
Less: Net realized 
investment gains  

$3,014 

$3,439 

$3,692 

$3,673 

$2,473 

47 

2  

51 

106 

32 

Operating income 

$2,967 

$3,437 

$3,641 

$3,567 

$2,441 

As of December 31,

(Dollars in millions) 

2016 

2015 

2014 

2013 

2012 

2011

Reconciliation of shareholders’ equity to adjusted shareholders’ equity

Shareholders’ equity 
Less: Net unrealized investment 
gains, net of tax 
Less: Net realized investment 
gains, net of tax 

$23,221 

$23,598 

$24,836 

$24,796 

$25,405 

$24,477

730 

47 

1,289 

1,966 

1,322 

3,103 

2,871

2 

51 

106  

32 

36

Adjusted shareholders’ equity 

$22,444 

$22,307 

$22,819 

$23,368 

$22,270 

$21,570

For the year ended December 31, 

(Dollars in millions) 

2016 

2015 

2014 

2013 

2012

Calculation of return on equity and operating return on equity

Net income 
Average shareholders’ equity 

 $3,014  
 24,182  

 $3,439  
 24,304  

 $3,692  
 25,264  

 $3,673  
 25,099  

 $2,473 
 25,192 

Return on equity 

12.5% 

14.2% 

14.6% 

14.6% 

9.8%

Operating income 
Adjusted average 
shareholders’ equity 

 $2,967  

 $3,437  

 $3,641  

 $3,567  

 $2,441 

 22,386  

 22,681  

 23,447  

 23,004  

 22,158 

Operating return on equity 

13.3% 

15.2% 

15.5% 

15.5% 

11.0%

Average shareholders’ equity is (a) the sum of total shareholders’ equity at the beginning and end of each of the quarters for the period presented divided by 
(b) the number of quarters in the period presented times two.

Adjusted shareholders’ equity is shareholders’ equity excluding net unrealized investment gains (losses), net of tax, and net realized investment gains (losses), 
net of tax, for the period presented. Adjusted average shareholders’ equity is (a) the sum of adjusted shareholders’ equity at the beginning and end of each of 
the quarters for the period presented divided by (b) the number of quarters in the period presented times two.

Return on equity is the ratio of (a) net income for the period presented to (b) average shareholders’ equity for the period presented. Operating return on 
equity is the ratio of (a) operating income for the period presented to (b) adjusted average shareholders’ equity for the period presented.
Deﬁ nitions of other terms used in this Annual Report are included in the Glossary of Selected Insurance Terms portion of the attached Form 10-K.

© 2017 The Travelers Indemnity Company. All rights reserved. 56313

The Travelers Companies, Inc.
485 Lexington Avenue
New York, NY 10017-2630

800.328.2189

NYSE: TRV

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