Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

			Page
Report of Independent Registered Public Accounting Firm			122
Consolidated Financial Statements:
Statement of Income for the years ended December 31, 2020, 2019 and 2018			124
Statement of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018			125
Balance Sheet at December 31, 2020 and 2019			126
Statement of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018			127
Statement of Cash Flows for the years ended December 31, 2020, 2019 and 2018			128
Notes to Consolidated Financial Statements			129
Schedules:
Schedule II - Condensed Financial Information of Registrant (Parent Company Only)			219
Schedule III - Supplementary Insurance Information			224
Schedule V - Valuation and Qualifying Accounts			225
Schedule VI - Supplementary Information Concerning Property-Casualty Insurance Operations			226

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

The Travelers Companies, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes and financial statement schedules as listed in the accompanying index to consolidated financial statements and schedules (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, 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) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 11, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the estimate of claims and claim adjustment expense reserves

As discussed in Notes 1 and 8 to the consolidated financial statements, the claims and claim adjustment expense reserves represent the Company’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. The Company's claims and claim adjustment expense reserves balance at December 31, 2020 was $54.5 billion.

We identified the evaluation of the estimate of claims and claim adjustment expense reserves as a critical audit matter. The process of evaluating the estimate of claims and claim adjustment expense reserves involves significant auditor judgment due to the inherent uncertainty in the ultimate amounts and timing of claim payments, which may be affected by a number of internal and external considerations, such as:

• Changes in claims handling procedures;

• Economic inflation and changes in the tort environment; and

• Legislative changes, among others.

Evaluating the impact of these considerations on the ultimate costs of claims and claim adjustment expenses requires specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s reserving process for claims and claim adjustment expense reserves. This included controls related to the actuarial analyses and the determination of the Company’s estimate of the claims and claim adjustment expense reserves. We involved actuarial professionals with specialized skills and knowledge who assisted in:

• Assessing the assumptions and methodologies underlying the Company’s claims and claim adjustment expense reserve estimate;

• Evaluating the Company’s estimates by performing independent analyses of claims and claim adjustment expense reserves for certain lines of business;

• Assessing the Company's internally prepared actuarial analyses in comparison to the Company's internal experience and related industry trends for selected other lines of business; and

• Developing an overall range of reserve estimates and assessing the position of the Company’s recorded reserve relative to the range.

/s/ KPMG LLP
KPMG LLP

We have served as the Company’s auditor since 1994.

New York, New York

February 11, 2021

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

(in millions, except per share amounts)

For the year ended December 31,						2020						2019						2018
Revenues
Premiums						$	29,044					$	28,272					$	27,059
Net investment income						2,227						2,468						2,474
Fee income						429						459						432
Net realized investment gains						2						113						114
Other revenues						279						269						203
Total revenues						31,981						31,581						30,282
Claims and expenses
Claims and claim adjustment expenses						19,123						19,133						18,291
Amortization of deferred acquisition costs						4,773						4,601						4,381
General and administrative expenses						4,509						4,365						4,297
Interest expense						339						344						352
Total claims and expenses						28,744						28,443						27,321
Income before income taxes						3,237						3,138						2,961
Income tax expense						540						516						438
Net income						$	2,697					$	2,622					$	2,523
Net income per share
Basic						$	10.56					$	10.01					$	9.37
Diluted						$	10.52					$	9.92					$	9.28
Weighted average number of common shares outstanding
Basic						253.5						260.0						267.4
Diluted						254.6						262.3						269.8

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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(in millions)

For the year ended December 31,						2020						2019						2018
Net income						$	2,697					$	2,622					$	2,523
Other comprehensive income (loss):
Changes in net unrealized gains (losses) on investment securities:
Having no credit losses recognized in the consolidated statement of income						2,331						2,994						(1,489)
Having credit losses recognized in the consolidated statement of income						(9)						(4)						(27)
Net changes in benefit plan assets and obligations						18						33						(56)
Net changes in unrealized foreign currency translation						12						117						(247)
Other comprehensive income (loss) before income taxes						2,352						3,140						(1,819)
Income tax expense (benefit)						490						641						(349)
Other comprehensive income (loss), net of taxes						1,862						2,499						(1,470)
Comprehensive income						$	4,559					$	5,121					$	1,053

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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions)

At December 31,						2020						2019
Assets
Fixed maturities, available for sale, at fair value (amortized cost $68,830 and $65,281; allowance for expected credit losses of $2 at December 31, 2020)						$	74,003					$	68,134
Equity securities, at fair value (cost $387 and $376)						453						425
Real estate investments						1,026						963
Short-term securities						5,511						4,943
Other investments						3,430						3,419
Total investments						84,423						77,884
Cash						721						494
Investment income accrued						603						618
Premiums receivable (net of allowance for expected credit losses of $105 at December 31, 2020)						7,829						7,909
Reinsurance recoverables (net of allowance for estimated uncollectible reinsurance of $146 at December 31, 2020)						8,350						8,235
Ceded unearned premiums						772						689
Deferred acquisition costs						2,358						2,273
Contractholder receivables (net of allowance for expected credit losses of $19 at December 31, 2020)						4,242						4,599
Goodwill						3,976						3,961
Other intangible assets						317						330
Other assets						3,173						3,130
Total assets						$	116,764					$	110,122
Liabilities
Claims and claim adjustment expense reserves						$	54,521					$	51,849
Unearned premium reserves						15,222						14,604
Contractholder payables						4,261						4,619
Payables for reinsurance premiums						356						363
Deferred taxes						558						137
Debt						6,550						6,558
Other liabilities						6,095						6,049
Total liabilities						87,563						84,179
Shareholders’ equity
Common stock (1,750.0 shares authorized; 252.4 and 255.5 shares issued and outstanding)						23,743						23,469
Retained earnings						38,771						36,977
Accumulated other comprehensive income						2,502						640
Treasury stock, at cost (527.3 and 522.1 shares)						(35,815)						(35,143)
Total shareholders’ equity						29,201						25,943
Total liabilities and shareholders’ equity						$	116,764					$	110,122

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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(in millions)

For the year ended December 31,						2020						2019						2018
Common stock
Balance, beginning of year						$	23,469					$	23,144					$	22,886
Employee share-based compensation						123						180						108
Compensation amortization under share-based plans and other changes						151						145						150
Balance, end of year						23,743						23,469						23,144
Retained earnings												.
Balance, beginning of year						36,977						35,204						33,462
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020						(43)						—						—
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018						—						—						22
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018						—						—						24
Net income						2,697						2,622						2,523
Dividends						(864)						(848)						(818)
Other						4						(1)						(9)
Balance, end of year						38,771						36,977						35,204
Accumulated other comprehensive income (loss), net of tax
Balance, beginning of year						640						(1,859)						(343)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018						—						—						(22)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018						—						—						(24)
Other comprehensive income (loss)						1,862						2,499						(1,470)
Balance, end of year						2,502						640						(1,859)
Treasury stock, at cost
Balance, beginning of year						(35,143)						(33,595)						(32,274)
Treasury stock acquired — share repurchase authorization						(625)						(1,500)						(1,270)
Net shares acquired related to employee share-based compensation plans						(47)						(48)						(51)
Balance, end of year						(35,815)						(35,143)						(33,595)
Total shareholders’ equity						$	29,201					$	25,943					$	22,894
Common shares outstanding
Balance, beginning of year						255.5						263.6						271.4
Treasury stock acquired — share repurchase authorization						(4.9)						(10.8)						(9.6)
Net shares issued under employee share-based compensation plans						1.8						2.7						1.8
Balance, end of year						252.4						255.5						263.6

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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

For the year ended December 31,						2020						2019						2018
Cash flows from operating activities
Net income						$	2,697					$	2,622					$	2,523
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains						(2)						(113)						(114)
Depreciation and amortization						789						763						803
Deferred federal income tax benefit						(29)						(33)						(13)
Amortization of deferred acquisition costs						4,773						4,601						4,381
Equity in income from other investments						(130)						(251)						(365)
Premiums receivable						94						(384)						(393)
Reinsurance recoverables						(162)						157						(100)
Deferred acquisition costs						(4,854)						(4,747)						(4,488)
Claims and claim adjustment expense reserves						2,622						1,047						1,246
Unearned premium reserves						592						1,008						710
Other						129						535						190
Net cash provided by operating activities						6,519						5,205						4,380
Cash flows from investing activities
Proceeds from maturities of fixed maturities						7,387						6,845						7,086
Proceeds from sales of investments:
Fixed maturities						3,057						2,187						3,546
Equity securities						111						140						178
Real estate investments						—						—						74
Other investments						281						459						511
Purchases of investments:
Fixed maturities						(14,073)						(10,711)						(13,526)
Equity securities						(112)						(94)						(117)
Real estate investments						(113)						(107)						(74)
Other investments						(487)						(497)						(537)
Net sales (purchases) of short-term securities						(566)						(957)						908
Securities transactions in the course of settlement						(47)						158						(56)
Other						(330)						(325)						(322)
Net cash used in investing activities						(4,892)						(2,902)						(2,329)
Cash flows from financing activities
Treasury stock acquired — share repurchase authorization						(625)						(1,500)						(1,270)
Treasury stock acquired — net employee share-based compensation						(47)						(48)						(51)
Dividends paid to shareholders						(861)						(844)						(814)
Payment of debt						(500)						(500)						(600)
Issuance of debt						490						492						591
Issuance of common stock-employee share options						127						213						132
Net cash used in financing activities						(1,416)						(2,187)						(2,012)
Effect of exchange rate changes on cash						16						5						(10)
Net increase in cash						227						121						29
Cash at beginning of year						494						373						344
Cash at end of year						$	721					$	494					$	373
Supplemental disclosure of cash flow information
Income taxes paid						$	578					$	428					$	408
Interest paid						$	339					$	338					$	347

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

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. All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2019 and 2018 financial statements to conform to the 2020 presentation.

Adoption of Accounting Standards

Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the Financial Accounting Standards Board (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 any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. Additionally, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments. The updated guidance was effective for the quarter ended March 31, 2018 and early application of certain of the provisions in the updated guidance was allowed. The Company adopted the updated guidance for the quarter ended March 31, 2018 and elected to report changes in the fair value of equity investments in net realized investment gains (losses). The adoption of this guidance resulted in the recognition of $22 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased accumulated other comprehensive income (AOCI) by the same amount.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued updated guidance that allows a reclassification from AOCI to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). The updated guidance was effective for the quarter ended March 31, 2019, with early adoption allowed, and was required to be applied retrospectively to each period in which there are items impacted by the TCJA remaining in AOCI or at the beginning of the period of adoption. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from AOCI to retained earnings as of January 1, 2018. This reclassification resulted in an increase in retained earnings of $24 million as of January 1, 2018 and a decrease in AOCI by the same amount.

Leases

In February 2016, the FASB issued updated guidance on the accounting for leases that requires lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months and retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease).

The updated guidance was effective for reporting periods beginning after December 15, 2018 and required 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. Alternatively, an entity may elect to recognize a cumulative effect adjustment to the the opening balance of retained earnings in the year of adoption. Early adoption was permitted.

The Company adopted the updated guidance for leases for the quarter ended March 31, 2019 and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

previous lease accounting guidance. The Company also elected to apply all practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption, including using hindsight to determine the lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $320 million as part of other assets and a lease liability of $384 million as part of other liabilities in the consolidated balance sheet, as well as de-recognizing the liability for deferred rent that was required under the previous guidance, for its corporate real estate agreements at March 31, 2019. The cumulative effect adjustment to the opening balance of retained earnings at January 1, 2019 was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.

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

In August 2018, the FASB issued updated guidance on a customer's accounting for the implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor, i.e. a service contract. The updated guidance is effective for the quarter ending March 31, 2020, with early adoption permitted. The updated guidance requires an entity to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The updated guidance also requires the entity to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. The Company elected to adopt the guidance for the quarter ended March 31, 2019 and applied the guidance prospectively. The adoption of the updated guidance did not 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 (including reinsurance recoverables and structured settlements that are recorded as part of 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, are 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 previous 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 Company adopted the updated guidance for the quarter ended March 31, 2020. For available-for-sale debt securities, the updated guidance was applied prospectively. For financial instruments measured at amortized cost, the updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings as of January 1, 2020, the beginning of the period of adoption. The adoption of this guidance resulted in the recognition of an after-tax cumulative effect adjustment of $43 million to reflect the impact of recognizing expected credit losses, as compared to incurred credit losses recognized under the previous guidance. This adjustment is primarily associated with structured settlements that are recorded as part of reinsurance recoverables. The cumulative effect adjustment decreased retained earnings as of January 1, 2020 and increased the allowance for estimated uncollectible reinsurance.

Registered Debt Offerings that Include Credit Enhancements from an Affiliate

In March 2020, the Securities and Exchange Commission (SEC) issued Release No. 33-10762 to adopt amendments to the financial disclosure requirements related to certain debt securities, including registered debt securities issued by a wholly-owned, operating subsidiary that are fully and unconditionally guaranteed by the parent company. Prior to the amendments, a parent guarantor was required to provide condensed consolidating financial information for so long as the guaranteed securities were outstanding, regardless of whether the subsidiary issuer could have suspended its public reporting obligations under the applicable SEC requirements with respect to the securities. In accordance with the amended requirements, a parent guarantor

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

may cease providing the condensed consolidating financial information if the corresponding subsidiary issuer’s public reporting obligation is suspended.

In October 2020, the FASB issued updated guidance to amend and supersede SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10762. The amendments to the release became effective on January 4, 2021; however, the SEC permitted voluntary compliance in advance of the effective date. The Company elected to apply the amended requirements beginning with the quarter ended March 31, 2020, and no longer provides condensed consolidating financial information regarding the registered debt obligations of its subsidiaries, Travelers Property Casualty Corp. and Travelers Insurance Group Holdings Inc., that are disclosed in note 9.

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.

The Company adopted the updated guidance for the quarter ended March 31, 2020 and applied the guidance prospectively. The adoption of the updated guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

Other Accounting Standards Not Yet Adopted

Income Taxes - Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued updated guidance for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for the quarter ending March 31, 2021. 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.

Accounting Policies

Investments

Fixed Maturities

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 reported at fair value, with unrealized investment gains and losses, net of income taxes, charged or credited directly to other comprehensive income.

Equity Securities

Equity securities, which include public common and non-redeemable preferred stocks, are reported at fair value with changes in fair value recognized in net income.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 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 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 recognized in net 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.

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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 credit 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.

Investment Impairments

The Company conducts a periodic review to identify and evaluate invested assets that may have credit impairments.

Credit Impairments Related to Fixed Maturity Investments

Some of the factors considered in assessing impairment of fixed maturity investments due to credit-related factors include: (1) the extent to which the fair value has been less than amortized cost; (2) 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; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value.

Beginning on January 1, 2020, credit losses are recognized through an allowance account. See note 1 - Adoption of Accounting Standards - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments for additional information.

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 (non-credit factors) is reported in other comprehensive income. The allowance is adjusted for any additional credit losses and subsequent recoveries. Upon recognizing a credit loss, the cost basis is not adjusted.

For fixed maturity investments where the Company records a credit loss, a determination is made as to the cause of the impairment and whether the Company expects a recovery in the value. For fixed maturity investments where the Company expects a recovery in value, the constant effective yield method is utilized, and the investment is amortized to par.

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). The new cost basis of the investment is the previous amortized cost basis less the impairment recognized in net realized investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value.

The Company reports investment income accrued separately from fixed maturity investments, available for sale, and has elected not to measure an allowance for credit losses for investment income accrued. Investment income accrued is written off through net realized investment gains (losses) at the time the issuer of the bond defaults or is expected to default on payments.

Uncollectible available-for-sale debt securities are written-off when the Company determines that no additional payments of principal or interest will be received.

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).

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For non-structured fixed maturities (U.S. Treasury securities, obligations of U.S. government and government agencies and authorities, obligations of states, municipalities and political subdivisions, debt securities issued by foreign governments and certain corporate debt), the estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate 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 estimate of the parameters applied to the assets underlying the securitization.

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 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

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

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, from time to time, 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 (i.e., the Company is not permitted to re-pledge or sell any such collateral). 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. Included in reinsurance recoverables are amounts related to certain structured settlements. The Company reports its reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible. 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. For structured settlements, the allowance is also based upon the Company’s ongoing review of life insurers’ creditworthiness and estimated amounts of coverage that would be available from state guaranty funds if a life insurer defaults. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. The allowance also includes estimated uncollectible amounts related to dispute risk with reinsurers. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of claims and claim adjustment expenses. 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.

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 both contractholder payables and contractholder receivables. Contractholder receivables are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, changes in policyholder credit standing, and other relevant factors. A probability-of-default methodology, which reflects current and forecasted economic conditions, is used to estimate the allowance for expected credit losses.

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 Insurance; Bond & Specialty Insurance; and Personal Insurance. The

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

As a result of the reviews performed for the years ended December 31, 2020, 2019 and 2018, 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 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. 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, 2020 and 2019, the Company had a liability of $178 million and $184 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $10 million and $13 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

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

premiums for participating dividend policies were approximately 1% of total net written premiums for each of the years ended December 31, 2020, 2019 and 2018. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled $69 million and $71 million at December 31, 2020 and 2019, respectively.

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 expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. Credit risk is partially mitigated by the Company’s ability to cancel the policy if the policyholder does not pay the premium. However, the impact of extended payment terms and non-cancellation concessions granted to customers as a result of the novel coronavirus COVID-19 and related economic conditions is also considered in the Company's evaluation of the allowance.

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 revenues from risk and claims management services provided to the Company’s insureds and third-party non-insureds, as well as policy issuance and claims management services to workers' compensation residual market pools. Fee income is earned over the policy period for the services provided to the Company’s insureds, and either over the contract period or as the Company completes its service obligations for the services provided to third-party non-insureds.

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Revenues

Other revenues include revenues from premium installment charges, which are recognized as collected, gains and losses on dispositions of assets and redemption of debt, and other miscellaneous revenues, including gains recognized as a result of settlements of reinsurance disputes and claim-related legal matters.

Other revenues also include revenues from noninsurance subsidiaries (other than fee income) for insurance-related services and on-line insurance brokerage services and is recognized as the service is provided to the customer.

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 14. 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

Business Insurance

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

Domestic

*•*Select Accounts provides small businesses with property and casualty insurance products and services, including commercial multi-peril, workers’ compensation, commercial automobile, general liability and commercial property.

*•*Middle Market provides mid-sized businesses with property and casualty insurance products and services, including workers’ compensation, general liability, commercial multi-peril, commercial automobile and commercial property, as

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, and additionally, provides mono-line umbrella and excess coverage insurance through Excess Casualty. Middle Market also provides 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 for equipment, including property and business interruption, through Boiler & Machinery.

*•*National Accounts provides large companies with casualty insurance products and services, including workers’ compensation, commercial automobile and general liability, generally utilizing loss-sensitive products, on both a bundled and unbundled basis, as well as risk management, claims administration and other insurance-related services. National Accounts also includes the Company’s commercial residual market business, which primarily offers workers’ compensation claims, policy management and other administrative services related to the involuntary market.

*•*National Property and Other provides traditional and customized commercial property insurance programs to large and mid-sized customers through National Property. National Property and Other also provides insurance coverage for the commercial trucking industry through Northland Transportation, and serves small- to medium-sized agricultural businesses, including farms, ranches and other agricultural-related operations through Agribusiness. National Property and Other also includes commercial property and general liability policies for small, difficult to place specialty classes of commercial business primarily on an excess and surplus lines basis through Northfield, and also offers tailored property and casualty insurance programs on an admitted basis for customers with common risk characteristics or coverage requirements through National Programs.

International

• International, through its operations in Canada, the United Kingdom and the Republic of Ireland, provides property and casualty insurance and risk management services to several customer groups, including, among others, those in the technology, manufacturing and public services industry sectors. International also provides insurance for both the foreign exposures of United States organizations and the United States exposures of foreign organizations through Global Services. At its Lloyd’s syndicate (Syndicate 5000), for which the Company provides 100% of the capital, International underwrites six principal businesses — international marine, retail marine, global property, construction & special risks, energy and aviation.

Business Insurance also includes Simply Business, a leading provider of small business insurance policies primarily in the United Kingdom, and Business Insurance Other, which primarily comprises the Company’s asbestos and environmental liabilities, and the assumed reinsurance and certain other runoff operations.

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 its customers in the United States and certain specialty insurance products in Canada, the United Kingdom, the Republic of Ireland and Brazil (through a joint venture, as described below), utilizing various degrees of financially-based underwriting approaches. The range of coverages includes performance, payment and commercial surety bonds for construction and general commercial enterprises; fidelity insurance for private companies, not-for-profit organizations and financial institutions; management liability coverages including directors’ and officers’ liability, employment practices liability, fiduciary liability and cyber risk for public corporations, private companies, not-for-profit organizations and financial institutions; professional liability coverage for a variety of professionals including, among others, lawyers and design professionals; and in the United States only, property, workers’ compensation, auto and general liability for financial institutions.

Bond & Specialty Insurance surety business in Brazil and Colombia is conducted through Junto Holding Brasil S.A. (Junto) and Junto Holding Latam S.A. in Brazil. The Company owns 49.5% of both Junto, a market leader in surety coverages in Brazil, and Junto Holding Latam S.A., which owns a majority interest in JMalucelli Travelers Seguros S.A., a Colombian surety

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

provider. These joint venture investments are accounted for using the equity method and are included in “other investments” on the consolidated balance sheet.

Personal Insurance

Personal Insurance writes a broad range of property and casualty insurance covering individuals’ personal risks, primarily in the United States, as well as in Canada. 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 and Other 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 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.

The following tables summarize the components of the Company’s revenues, income, net written premiums and total assets by reportable business segments.

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2. SEGMENT INFORMATION (Continued)

(for the year ended December 31, in millions)						Business Insurance						Bond & Specialty Insurance						Personal Insurance						Total Reportable Segments
2020
Premiums						$	15,294					$	2,823					$	10,927					$	29,044
Net investment income						1,633						213						381						2,227
Fee income						405						—						24						429
Other revenues						176						27						76						279
Total segment revenues (1)						$	17,508					$	3,063					$	11,408					$	31,979
Amortization and depreciation						$	3,069					$	579					$	1,908					$	5,556
Income tax expense						213						107						308						628
Segment income (1)						1,309						473						1,195						2,977
2019
Premiums						$	15,300					$	2,565					$	10,407					$	28,272
Net investment income						1,816						233						419						2,468
Fee income						437						—						22						459
Other revenues						155						26						87						268
Total segment revenues (1)						$	17,708					$	2,824					$	10,935					$	31,467
Amortization and depreciation						$	3,037					$	533					$	1,787					$	5,357
Income tax expense						223						151						195						569
Segment income (1)						1,392						618						824						2,834
2018
Premiums						$	14,722					$	2,420					$	9,917					$	27,059
Net investment income						1,833						233						408						2,474
Fee income						412						—						20						432
Other revenues						112						23						66						201
Total segment revenues (1)						$	17,079					$	2,676					$	10,411					$	30,166
Amortization and depreciation						$	2,943					$	515					$	1,719					$	5,177
Income tax expense						259						198						42						499
Segment income (1)						1,638						793						297						2,728

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(1)Segment revenues for reportable business segments exclude net realized investment gains (losses) and revenues included in "interest expense and other." Segment income for reportable business segments equals net income excluding the after-tax impact of net realized investment gains (losses) and income (loss) from "interest expense and other."

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2. SEGMENT INFORMATION (Continued)

Net written premiums by market were as follows:

(for the year ended December 31, in millions)						2020						2019						2018
Business Insurance:
Domestic:
Select Accounts						$	2,821					$	2,911					$	2,828
Middle Market						8,511						8,630						8,214
National Accounts						996						1,051						1,025
National Property and Other						2,086						1,965						1,805
Total Domestic						14,414						14,557						13,872
International						1,017						1,072						1,084
Total Business Insurance						15,431						15,629						14,956
Bond & Specialty Insurance:
Domestic:
Management Liability						1,769						1,605						1,455
Surety						845						866						835
Total Domestic						2,614						2,471						2,290
International						337						268						238
Total Bond & Specialty Insurance						2,951						2,739						2,528
Personal Insurance:
Domestic:
Agency:
Automobile						5,080						5,124						4,972
Homeowners and Other						5,185						4,540						4,148
Total Agency						10,265						9,664						9,120
Direct-to-Consumer						433						412						396
Total Domestic						10,698						10,076						9,516
International						652						707						708
Total Personal Insurance						11,350						10,783						10,224
Total consolidated net written premiums						$	29,732					$	29,151					$	27,708

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)						2020						2019						2018
Revenue reconciliation
Earned premiums
Business Insurance:
Domestic:
Workers’ compensation						$	3,378					$	3,829					$	3,899
Commercial automobile						2,761						2,632						2,388
Commercial property						2,087						1,937						1,828
General liability						2,401						2,342						2,181
Commercial multi-peril						3,552						3,453						3,333
Other						54						40						28
Total Domestic						14,233						14,233						13,657
International						1,061						1,067						1,065
Total Business Insurance						15,294						15,300						14,722
Bond & Specialty Insurance:
Domestic:
Fidelity and surety						1,075						1,036						1,017
General liability						1,219						1,082						1,004
Other						237						216						195
Total Domestic						2,531						2,334						2,216
International						292						231						204
Total Bond & Specialty Insurance						2,823						2,565						2,420
Personal Insurance:
Domestic
Automobile						5,280						5,311						5,097
Homeowners and Other						4,988						4,393						4,135
Total Domestic						10,268						9,704						9,232
International						659						703						685
Total Personal Insurance						10,927						10,407						9,917
Total earned premiums						29,044						28,272						27,059
Net investment income						2,227						2,468						2,474
Fee income						429						459						432
Other revenues						279						268						201
Total segment revenues						31,979						31,467						30,166
Other revenues						—						1						2
Net realized investment gains						2						113						114
Total revenues						$	31,981					$	31,581					$	30,282
Income reconciliation, net of tax
Total segment income						$	2,977					$	2,834					$	2,728
Interest Expense and Other (1)						(291)						(297)						(298)
Core income						2,686						2,537						2,430
Net realized investment gains						11						85						93
Net income						$	2,697					$	2,622					$	2,523

---

(1) The primary component of Interest Expense and Other was after-tax interest expense of $268 million, $272 million and $278 million in 2020, 2019 and 2018, respectively.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

(at December 31, in millions)						2020						2019
Asset reconciliation:
Business Insurance						$	88,422					$	83,896
Bond & Specialty Insurance						9,420						8,599
Personal Insurance						18,328						17,015
Total assets for reportable segments						116,170						109,510
Other assets (1)						594						612
Total consolidated assets						$	116,764					$	110,122

---

(1) The primary components of other assets at both December 31, 2020 and 2019, were accrued over-funded benefit plan assets related to the Company's qualified domestic pension plan and other intangible assets.

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)						2020						2019						2018
U.S.						$	30,123					$	29,638					$	28,418
Non-U.S.:
Canada						1,278						1,371						1,293
Other Non-U.S.						580						572						571
Total Non-U.S.						1,858						1,943						1,864
Total revenues						$	31,981					$	31,581					$	30,282

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:

						Amortized						Allowance for Expected Credit Losses						Gross Unrealized												Fair
(at December 31, 2020, in millions)						Cost									Gains						Losses						Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	2,111					$	—					$	38					$	—					$	2,149
Obligations of states, municipalities and political subdivisions:
Local general obligation						17,289						—						1,370						2						18,657
Revenue						11,806						—						909						—						12,715
State general obligation						1,343						—						101						—						1,444
Pre-refunded						3,325						—						219						—						3,544
Total obligations of states, municipalities and political subdivisions						33,763						—						2,599						2						36,360
Debt securities issued by foreign governments						1,028						—						26						—						1,054
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						2,222						—						139						—						2,361
All other corporate bonds						29,683						2						2,382						9						32,054
Redeemable preferred stock						23						—						2						—						25
Total						$	68,830					$	2					$	5,186					$	11					$	74,003

						Amortized						Gross Unrealized												Fair
(at December 31, 2019, in millions)						Cost						Gains						Losses						Value
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	2,076					$	19					$	—					$	2,095
Obligations of states, municipalities and political subdivisions:
Local general obligation						15,490						829						4						16,315
Revenue						9,731						586						2						10,315
State general obligation						1,167						64						—						1,231
Pre-refunded						1,968						88						—						2,056
Total obligations of states, municipalities and political subdivisions						28,356						1,567						6						29,917
Debt securities issued by foreign governments						1,167						8						2						1,173
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						3,192						91						3						3,280
All other corporate bonds						30,442						1,195						18						31,619
Redeemable preferred stock						48						2						—						50
Total						$	65,281					$	2,882					$	29					$	68,134

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

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, 2020, in millions)						Amortized Cost						Fair Value
Due in one year or less						$	5,074					$	5,127
Due after 1 year through 5 years						18,476						19,660
Due after 5 years through 10 years						18,200						19,936
Due after 10 years						24,858						26,919
						66,608						71,642
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						2,222						2,361
Total						$	68,830					$	74,003

Pre-refunded bonds of $3.54 billion and $2.06 billion at December 31, 2020 and 2019, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds.

The Company’s fixed maturity investment portfolio at December 31, 2020 and 2019 included $2.36 billion and $3.28 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs). Included in the totals at December 31, 2020 and 2019 were $1.24 billion and $1.52 billion, 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 $1.12 billion and $1.76 billion at December 31, 2020 and 2019, respectively. Approximately 65% and 54% of the Company’s CMO holdings at December 31, 2020 and 2019, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The weighted average credit rating of the $396 million and $816 million of non-guaranteed CMO holdings at December 31, 2020 and 2019, respectively, was “Aa1” and “Aaa/Aa1,” respectively. The weighted average credit rating of all of the above securities was "Aaa/Aa1” at both December 31, 2020 and 2019.

At December 31, 2020 and 2019, the Company held commercial mortgage-backed securities (CMBS, including FHA project loans) of $1.42 billion and $1.51 billion, respectively, which are included in “All other corporate bonds” in the tables above. At December 31, 2020 and 2019, approximately $392 million and $559 million of these securities, respectively, or the loans backing such securities, contained guarantees by the U.S. government or a government-sponsored enterprise. The weighted average credit rating of the $1.03 billion and $950 million of non-guaranteed securities at December 31, 2020 and 2019, respectively, was “Aaa” at both dates. The CMBS portfolio is supported by loans that are diversified across economic sectors and geographical areas. The weighted average credit rating of the CMBS portfolio was “Aaa” at both December 31, 2020 and 2019.

At December 31, 2020 and 2019, the Company had $139 million and $404 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 $3.06 billion, $2.19 billion and $3.55 billion in 2020, 2019 and 2018, respectively. Gross gains of $70 million, $67 million and $51 million and gross losses of $3 million, $8 million and $18 million were realized on those sales in 2020, 2019 and 2018, respectively.

At December 31, 2020 and 2019, the Company’s insurance subsidiaries had $4.45 billion and $4.34 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 $52 million and $54 million at December 31, 2020 and 2019, respectively. Other

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

investments pledged as collateral securing outstanding letters of credit had a fair value of $1 million at both December 31, 2020 and 2019. In addition, the Company utilizes Lloyd’s trust deposits, whereby owned securities with a fair value of approximately $119 million and $173 million held by a wholly-owned subsidiary at December 31, 2020 and 2019, respectively, and $35 million and $34 million held by TRV at December 31, 2020 and 2019, respectively, were pledged into Lloyd’s trust accounts to provide a portion of the capital needed to support the Company’s obligations at Lloyd’s.

Equity Securities

The cost and fair value of investments in equity securities were as follows:

(at December 31, 2020, in millions)						Cost						Gross Gains						Gross Losses						Fair Value
Public common stock						$	352					$	70					$	12					$	410
Non-redeemable preferred stock						35						8						—						43
Total						$	387					$	78					$	12					$	453

(at December 31, 2019, in millions)						Cost						Gross Gains						Gross Losses						Fair Value
Public common stock						$	341					$	45					$	3					$	383
Non-redeemable preferred stock						35						7						—						42
Total						$	376					$	52					$	3					$	425

The Company recognized $25 million and $61 million of net gains on equity securities still held as of December 31, 2020 and 2019, 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 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 not material in 2020, $0 in 2019 and $74 million in 2018. Gross gains of $23 million and gross losses of $0 million were realized on those sales in 2018. Accumulated depreciation on real estate held for investment purposes was $462 million and $422 million at December 31, 2020 and 2019, respectively.

Future minimum rental income on operating leases relating to the Company’s real estate properties is expected to be $115 million, $101 million, $75 million, $58 million and $38 million for 2021, 2022, 2023, 2024 and 2025, respectively, and $75 million for 2026 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 45 days to maturity at December 31, 2020. The amortized cost of these securities, which totaled $5.51 billion and $4.94 billion at December 31, 2020 and 2019, respectively, approximated their fair value.

Other Investments

Included in other investments are private equity, hedge fund and real estate partnerships that are accounted for under the equity method of accounting and typically report their financial statement information to the Company one month to three months following the end of the reporting period. Accordingly, the impact of any volatility in global financial markets on net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

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. The Company considers an investment in a VIE in which it has a 20% or greater equity interest as a significant VIE. Neither the Company’s carrying amounts nor the unfunded commitments related to these significant VIE’s are material individually or in the aggregate.

Unrealized Investment Losses

The following tables summarize, for all fixed maturities classified as available for sale in an unrealized loss position at December 31, 2020 and 2019, 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 a credit loss impairment exists.

						Less than 12 months												12 months or longer												Total
(at December 31, 2020, in millions)						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	92					$	—					$	—					$	—					$	92					$	—
Obligations of states, municipalities and political subdivisions						245						2						—						—						245						2
Debt securities issued by foreign governments						7						—						—						—						7						—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						20						—						1						—						21						—
All other corporate bonds						681						6						97						3						778						9
Total fixed maturities						$	1,045					$	8					$	98					$	3					$	1,143					$	11

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

						Less than 12 months												12 months or longer												Total
(at December 31, 2019, in millions)						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	5					$	—					$	193					$	—					$	198					$	—
Obligations of states, municipalities and political subdivisions						668						6						12						—						680						6
Debt securities issued by foreign governments						257						1						147						1						404						2
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						399						2						131						1						530						3
All other corporate bonds						1,571						10						662						8						2,233						18
Total fixed maturities						$	2,900					$	19					$	1,145					$	10					$	4,045					$	29

At December 31, 2020, the amount of gross unrealized losses for all fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost was not significant.

Credit Impairment Charges

Credit 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)						2020						2019						2018
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						15						4						1
Redeemable preferred stock						—						—						—
Total fixed maturities						15						4						1
Other investments						40						—						—
Total						$	55					$	4					$	1

Net realized investment gains in 2020 included $40 million of realized losses related to the other-than-temporary impairment of the carrying value of an equity method investment included in other investments.

The following table presents a reconciliation of the beginning and ending balances of the allowance for credit losses on fixed maturities classified as available for sale:

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

						Fixed Maturities
(for the twelve months ended December 31, 2020 in millions)						Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities						All Other Corporate Bonds						Total
Balance, January 1, 2020						$	—					$	—					$	—
Additions for expected credit losses on securities where no credit losses were previously recognized						—						10						10
Additions (reductions) for expected credit losses on securities where credit losses were previously recognized						—						(6)						(6)
Reductions due to sales/defaults of credit-impaired securities						—						(2)						(2)
Reductions for impairments of securities which the Company intends to sell or more likely than not will be required to sell (1)						—						—						—
Balance, December 31, 2020						$	—					$	2					$	2

---

(1)Credit impairment charges recognized in net realized investment gains for the twelve months ended December 31, 2020 included $13 million of credit losses on fixed maturity securities which the Company intends to sell. An allowance for expected credit losses was not previously recorded for these securities.

The following table presents the cumulative amount of, and the changes during the year in, credit losses on fixed maturities held at December 31, 2019 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:

						Fixed Maturities
(for the twelve months ended December 31, 2019 in millions)						Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities						All Other Corporate Bonds						Total
Cumulative OTTI Credit Losses Recognized for Securities Held, December 31, 2018						$	15					$	42					$	57
Additions for OTTI losses on securities where no credit losses were previously recognized						—						—						—
Additions (reductions) for OTTI losses on securities where credit losses were previously recognized						—						—						—
Reductions due to sales/defaults of credit-impaired securities						(9)						(49)						(58)
Adjustments to book value of credit-impaired securities due to changes in cash flows						3						10						13
Cumulative OTTI Credit Losses Recognized for Securities Held, December 31, 2019						$	9					$	3					$	12

Credit losses related to the fixed maturity portfolio for 2020 and 2019 represented less than 1% of the fixed maturity portfolio on a pre-tax basis and less than 1% of shareholders' equity on an after-tax basis at both December 31, 2020 and 2019.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Concentrations and Credit Quality

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, 2020 and 2019, 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.

Included in fixed maturities are below investment grade securities totaling $1.34 billion and $1.46 billion at December 31, 2020 and 2019, 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.

Net Investment Income

(for the year ended December 31, in millions)						2020						2019						2018
Gross investment income
Fixed maturities						$	2,011					$	2,070					$	1,980
Equity securities						15						15						16
Short-term securities						44						105						92
Real estate investments						48						55						48
Other investments						146						263						377
Gross investment income						2,264						2,508						2,513
Investment expenses						37						40						39
Net investment income						$	2,227					$	2,468					$	2,474

Changes in net unrealized gains (losses) 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)						2020						2019						2018
Changes in net unrealized investment gains (losses)
Fixed maturities						$	2,322					$	2,990					$	(1,515)
Other investments						—						—						(1)
Change in net pre-tax unrealized gains (losses) on investment securities						2,322						2,990						(1,516)
Related tax expense (benefit)						494						631						(319)
Change in net unrealized gains (losses) on investment securities						1,828						2,359						(1,197)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018						—						—						(22)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018						—						—						152
Balance, beginning of year						2,246						(113)						954
Balance, end of year						$	4,074					$	2,246					$	(113)

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS (Continued)

Derivative Financial Instruments

From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At December 31, 2020 and 2019, the Company had no open U.S. Treasury futures contracts. Net realized investment gains and losses related to U.S. Treasury futures contracts in 2020, 2019 and 2018 were not significant.

The Company has a put/call option that was entered into in connection with a business acquisition that allows the Company to acquire the remaining shares of the acquired company at a future date. Net realized investment gains and losses related to this put/call option in 2020 and 2019 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 gains and losses related to these derivatives in 2020, 2019 and 2018 were not significant.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS (Continued)

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.

Fixed Maturities

The Company utilized a pricing service to estimate fair value measurements for approximately 99% of its fixed maturities at both December 31, 2020 and 2019. 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 observable market-based indices that relate to corporate and high-yield fixed maturity investments. 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 either another internal pricing matrix, a present value income approach, or a broker quote (collectively, the other methodologies). The other methodologies include some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information available in the estimation of fair value, the Company includes the fair value estimates for bonds that are valued using the other methodologies in Level 3.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS (Continued)

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 $16 million fair value of these investments at December 31, 2020 and 2019, respectively, was disclosed in Level 1. At December 31, 2020 and 2019, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $35 million and $20 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, 2020 and 2019 in the amount disclosed in Level 3.

Other Liabilities

The Company has a put/call option that was entered into in connection with a business acquisition that allows the Company to acquire the remaining shares of the acquired company at a future date. The fair value of the put/call at December 31, 2020 and 2019 was $5 million and $8 million, respectively, and was determined using an internal model and is based on the acquired company's financial performance, adjusted for a risk margin and discounted to present value. The Company includes the fair value estimate of the put/call in Level 3.

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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.

(at December 31, 2020, in millions)						Total						Level 1						Level 2						Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	2,149					$	2,149					$	—					$	—
Obligations of states, municipalities and political subdivisions						36,360						—						36,349						11
Debt securities issued by foreign governments						1,054						—						1,054						—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						2,361						—						2,361						—
All other corporate bonds						32,054						—						31,899						155
Redeemable preferred stock						25						3						22						—
Total fixed maturities						74,003						2,152						71,685						166
Equity securities
Public common stock						410						410						—						—
Non-redeemable preferred stock						43						18						25						—
Total equity securities						453						428						25						—
Other investments						52						17						—						35
Total						$	74,508					$	2,597					$	71,710					$	201
Other liabilities						$	5					$	—					$	—					$	5

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS (Continued)

(at December 31, 2019, in millions)						Total						Level 1						Level 2						Level 3
Invested assets:
Fixed maturities
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities						$	2,095					$	2,095					$	—					$	—
Obligations of states, municipalities and political subdivisions						29,917						—						29,905						12
Debt securities issued by foreign governments						1,173						—						1,173						—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						3,280						—						3,280						—
All other corporate bonds						31,619						—						31,530						89
Redeemable preferred stock						50						—						50						—
Total fixed maturities						68,134						2,095						65,938						101
Equity securities
Public common stock						383						383						—						—
Non-redeemable preferred stock						42						13						29						—
Total equity securities						425						396						29						—
Other investments						36						16						—						20
Total						$	68,595					$	2,507					$	65,967					$	121
Other liabilities						$	8					$	—					$	—					$	8

The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2020 and 2019.

(in millions)						Fixed Maturities						Other Investments						Total
Balance at December 31, 2019						$	101					$	20					$	121
Total realized and unrealized investment gains (losses):
Reported in net realized investment gains (1)						(1)						—						(1)
Reported in increases in other comprehensive income (loss)						2						—						2
Purchases, sales and settlements/maturities:
Purchases						79						16						95
Sales						—						(1)						(1)
Settlements/maturities						(15)						—						(15)
Gross transfers into Level 3						3						—						3
Gross transfers out of Level 3						(3)						—						(3)
Balance at December 31, 2020						$	166					$	35					$	201
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						$	—					$	—					$	—

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(1)Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

The Company also includes in Level 3 the put/call option entered into in connection with a business acquisition that is reported in other liabilities and had a fair value of $5 million at December 31, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. FAIR VALUE MEASUREMENTS (Continued)

(in millions)						Fixed Maturities						Other Investments						Total
Balance at December 31, 2018						$	186					$	36					$	222
Total realized and unrealized investment gains (losses):
Reported in net realized investment gains (1)						—						3						3
Reported in increases in other comprehensive income (loss)						4						—						4
Purchases, sales and settlements/maturities:
Purchases						38						6						44
Sales						(1)						(25)						(26)
Settlements/maturities						(19)						—						(19)
Gross transfers into Level 3						—						—						—
Gross transfers out of Level 3						(107)						—						(107)
Balance at December 31, 2019						$	101					$	20					$	121
Amount of total realized investment gains (losses) for the period included in the consolidated statement of income attributable to changes in the fair value of assets still held at the reporting date						$	—					$	—					$	—

---

(1)Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.

The Company also includes in Level 3 the put/call option entered into in connection with a business acquisition that is reported in other liabilities and had a fair value of $8 million at December 31, 2019.

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, 2020, in millions)						Carrying Value						Fair Value						Level 1						Level 2						Level 3
Financial assets:
Short-term securities						$	5,511					$	5,511					$	630					$	4,829					$	52
Financial liabilities:
Debt						$	6,450					$	8,976					$	—					$	8,976					$	—
Commercial paper						100						100						—						100						—

(at December 31, 2019, in millions)						Carrying Value						Fair Value						Level 1						Level 2						Level 3
Financial assets:
Short-term securities						$	4,943					$	4,943					$	685					$	4,204					$	54
Financial liabilities:
Debt						$	6,458					$	8,049					$	—					$	8,049					$	—
Commercial paper						100						100						—						100						—

The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the years ended December 31, 2020 and 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. ALLOWANCE FOR EXPECTED CREDIT LOSSES

Premiums Receivable

The following table presents the balances of premiums receivable, net of the allowance for expected credit losses, at January 1, 2020 and December 31, 2020, and the changes in the allowance for expected credit losses for the twelve months ended December 31, 2020.

												At and For the Twelve Months Ended December 31, 2020
(in millions)																		Premiums Receivable, Net of Allowance for Expected Credit Losses						Allowance for Expected Credit Losses
Balance, beginning of period																		$	7,909					$	49
Current period change for expected credit losses																								103
Write-offs of uncollectible premiums receivable																								47
Balance, end of period																		$	7,829					$	105

Reinsurance Recoverables

The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at January 1, 2020 and December 31, 2020, and the changes in the allowance for estimated uncollectible reinsurance for the twelve months ended December 31, 2020.

												At and For the Twelve Months Ended December 31, 2020
(in millions)																		Reinsurance Recoverables, Net of Allowance for Estimated Uncollectible Reinsurance						Allowance for Estimated Uncollectible Reinsurance
Balance, beginning of period																		$	8,235					$	92
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020																								53
Current period change for estimated uncollectible reinsurance																								1
Write-offs of uncollectible reinsurance recoverables																								—
Balance, end of period																		$	8,350					$	146

Of the total reinsurance recoverables at December 31, 2020, after deducting mandatory pools and associations and before allowances for estimated uncollectible reinsurance, $5.85 billion, or 87%, were rated by A.M. Best Company. The Company utilizes updated A.M. Best credit ratings on a quarterly basis when determining the allowance. Of the total rated by A.M. Best Company, 94% were rated A- or better. The remaining 13% of reinsurance recoverables were comprised of the following: 6% related to captive insurance companies, 1% related to the Company’s participation in voluntary pools, and 6% were balances from other companies not rated by A.M. Best Company. Certain of the Company's reinsurance recoverables are collateralized by letters of credit, funds held or trust agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. ALLOWANCE FOR EXPECTED CREDIT LOSSES (Continued)

Contractholder Receivables

The following table presents the balances of contractholder receivables, net of the allowance for expected credit losses, at January 1, 2020 and December 31, 2020, and the changes in the allowance for expected credit losses for the twelve months ended December 31, 2020.

												At and For the Twelve Months Ended December 31, 2020
(in millions)																		Contractholder Receivables, Net of Allowance for Expected Credit Losses						Allowance for Expected Credit Losses
Balance, beginning of period																		$	4,599					$	20
Current period change for expected credit losses																								1
Write-offs of uncollectible contractholder receivables																								2
Balance, end of period																		$	4,242					$	19

6. 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 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 a reinsurance agreement entered into in connection with catastrophe bonds issued by Long Point Re III to protect against certain weather-related and earthquake losses in the Northeastern United States, a Northeast property catastrophe excess-of-loss reinsurance treaty to protect against losses resulting from weather-related and earthquake catastrophes in the Northeastern United States and an underlying property aggregate catastrophe excess-of-loss reinsurance treaty to protect against the accumulation of certain property losses in North America. The Company also utilizes excess-of-loss treaties to protect against earthquake losses up to a certain threshold in Business 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. REINSURANCE (Continued)

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.

The following is a summary of reinsurance financial data reflected in the consolidated statement of income:

(for the year ended December 31, in millions)						2020						2019						2018
Written premiums
Direct						$	30,762					$	30,022					$	28,210
Assumed						1,001						1,041						1,042
Ceded						(2,031)						(1,912)						(1,544)
Total net written premiums						$	29,732					$	29,151					$	27,708
Earned premiums
Direct						$	29,978					$	28,994					$	27,536
Assumed						1,010						1,076						1,024
Ceded						(1,944)						(1,798)						(1,501)
Total net earned premiums						$	29,044					$	28,272					$	27,059
Percentage of assumed earned premiums to net earned premiums						3.5		%				3.8		%				3.8		%
Ceded claims and claim adjustment expenses incurred						$	1,030					$	1,089					$	1,293

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)						2020						2019
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses						$	3,731					$	3,476
Gross structured settlements						2,964						2,965
Mandatory pools and associations						1,801						1,886
Gross reinsurance recoverables						8,496						8,327
Allowance for estimated uncollectible reinsurance						(146)						(92)
Net reinsurance recoverables						$	8,350					$	8,235

Terrorism Risk Insurance Program

The Terrorism Risk Insurance Program is a Federal program administered by the Department of the Treasury authorized through December 31, 2027 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. REINSURANCE (Continued)

industry loss minimum under the program is $200 million. 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 80% of subject losses, after an insurer deductible, subject to an annual cap.

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 $2.61 billion for 2021. 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. Given that the law establishing the program remains untested, there is substantial uncertainty as to how it will be applied if an act of terrorism is certified under the program. In addition, application of the program to a specific event will depend upon whether the government has designated such event as a covered event. 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.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment. Each reportable segment includes goodwill associated with the Company’s international business which is subject to the impact of changes in foreign currency exchange rates.

(at December 31, in millions)						2020						2019
Business Insurance						$	2,613					$	2,601
Bond & Specialty Insurance						550						550
Personal Insurance						787						784
Other						26						26
Total						$	3,976					$	3,961

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. 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, 2020, in millions)						Gross Carrying Amount						Accumulated Amortization						Net
Subject to amortization
Customer-related						$	101					$	31					$	70
Contract-based (1)						205						184						21
Total subject to amortization						306						215						91
Not subject to amortization						226						—						226
Total						$	532					$	215					$	317

(at December 31, 2019, in millions)						Gross Carrying Amount						Accumulated Amortization						Net
Subject to amortization
Customer-related						$	99					$	21					$	78
Contract-based (1)						205						179						26
Total subject to amortization						304						200						104
Not subject to amortization						226						—						226
Total						$	530					$	200					$	330

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(1)Contract-based intangible assets subject to amortization are comprised of fair value adjustments on claims and claim adjustment expense reserves, reinsurance recoverables and other contract-related intangible assets. Fair value adjustments recorded in connection with insurance acquisitions were based on management’s estimate of nominal claims and claim adjustment expense reserves and reinsurance recoverables. The method used calculated a risk adjustment to a risk-free discounted reserve that would, if reserves ran off as expected, produce results that yielded the assumed cost-of-capital on the capital supporting the loss reserves. The fair value adjustments are reported as other intangible assets on the consolidated balance sheet, and the amounts measured in accordance with the acquirer’s accounting policies for insurance contracts have been reported as part of the claims and claim adjustment expense reserves and reinsurance recoverables. The intangible assets are being recognized into income over the expected payment pattern. Because the time value of money and the risk adjustment (cost of capital) components of the intangible assets run off at different rates, the amount recognized in income may be a net benefit in some periods and a net expense in other periods.

Amortization expense of intangible assets was $14 million, $15 million and $17 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense for all intangible assets subject to amortization is estimated to be $14 million in 2021, $13 million in 2022, $13 million in 2023, $12 million in 2024 and $12 million in 2025. Amortization expense for intangible assets arising from insurance contracts acquired in a business combination is estimated to be $4 million in 2021, $3 million in 2022, $3 million in 2023, $2 million in 2024 and $2 million in 2025.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES

Claims and claim adjustment expense reserves were as follows:

(at December 31, in millions)						2020						2019
Property-casualty						$	54,510					$	51,836
Accident and health						11						13
Total						$	54,521					$	51,849

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)						2020						2019						2018
Claims and claim adjustment expense reserves at beginning of year						$	51,836					$	50,653					$	49,633
Less reinsurance recoverables on unpaid losses						8,035						8,182						8,123
Cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020						53						—						—
Net reserves at beginning of year						43,854						42,471						41,510
Estimated claims and claim adjustment expenses for claims arising in the current year						19,285						18,854						18,614
Estimated increase (decrease) in claims and claim adjustment expenses for claims arising in prior years						(267)						164						(406)
Total increases						19,018						19,018						18,208
Claims and claim adjustment expense payments for claims arising in:
Current year						7,497						7,734						7,697
Prior years						9,092						10,060						9,363
Total payments						16,589						17,794						17,060
Unrealized foreign exchange loss (gain)						74						106						(187)
Net reserves at end of year						46,357						43,801						42,471
Plus reinsurance recoverables on unpaid losses						8,153						8,035						8,182
Claims and claim adjustment expense reserves at end of year						$	54,510					$	51,836					$	50,653

Gross claims and claim adjustment expense reserves at December 31, 2020 increased by $2.67 billion over December 31, 2019, primarily reflecting the impacts of (i) reduced judicial system and claim settlement activity largely related to COVID-19 and (ii) catastrophe losses in 2020. Gross claims and claim adjustment expense reserves at December 31, 2019 increased by $1.18 billion over December 31, 2018, primarily reflecting the impacts of higher volumes of insured exposures and loss cost trends for the current accident year.

Reinsurance recoverables on unpaid losses at December 31, 2020 increased by $118 million over December 31, 2019, primarily reflecting the impacts of catastrophe losses in 2020, partially offset by a lower level of recoverables from mandatory pools and associations and the $53 million increase in the allowance for estimated uncollectible reinsurance from the cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020. Reinsurance recoverables on unpaid losses at December 31, 2019 decreased by $147 million from December 31, 2018, primarily reflecting a decrease in recoverables related to mandatory pools and associations.

Beginning in late March, in response to COVID-19, a number of states have enacted changes designed to effectively expand workers’ compensation coverage by creating a presumption of compensability for certain types of workers. In addition, other states are considering similar changes. Depending on the number of states that institute such changes and the terms of the

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

changes, the Company could experience elevated claims frequency and severity for its workers’ compensation line, which could have a material adverse effect on its results of operations.

PG&E Corporation and Pacific Gas and Electric Company (together, PG&E) emerged from bankruptcy on July 1, 2020, the date the Debtors' and Shareholder Proponents' Joint Chapter 11 Plan of Reorganization Dated June 19, 2020 (the Plan) became effective. In accordance with the terms of the Plan, PG&E funded a trust from which the Company and other subrogation claimants have received, and/or will receive, recoveries related to the 2017 and 2018 California wildfires. In 2020, the Company recognized a subrogation benefit related to these claims of $403 million (the Company's estimate of its total recoveries from the trust prior to its expiration in 2025, pre-tax and net of expenses and amounts that inure to the benefit of the Company's reinsurers) and received payments from the trust of $380 million.

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 rates used were a range of 3.5% to 5.0% at both December 31, 2020 and December 31, 2019. Total reserves net of the discount were $2.69 billion and $2.48 billion, and the related amount of discount was $1.14 billion and $1.16 billion, at December 31, 2020 and 2019, respectively. Accretion of the discount is reported as part of “claims and claim adjustment expenses” in the consolidated statement of income and was $49 million in each of the years ended December 31, 2020, 2019 and 2018.

Prior Year Reserve Development

The following disclosures regarding reserve development are on a “net of reinsurance” basis.

2020

In 2020*,* estimated claims and claim adjustment expenses incurred included $267 million of net favorable development for claims arising in prior years, including $351 million of net favorable prior year reserve development and $49 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net unfavorable prior year reserve development in 2020 totaled $91 million, primarily driven by the following:

*•*Asbestos reserves - an increase of $295 million, primarily in the segment's domestic general liability product line;

*•*General liability (excluding asbestos and environmental) - higher than expected loss experience in the segment's domestic operations for primary and excess coverages for recent accident years, as well as an increase to general liability reserves in the Company's run-off operations related to policies issued more than 20 years ago;

• Commercial automobile - higher than expected loss experience in the segment's domestic operations for recent accident years; and

*•*Commercial multi-peril (excluding PG&E subrogation recoveries and asbestos and environmental) - higher than expected loss experience in the segment's domestic operations for recent accident years.

Partially offset by:

*•*Workers' compensation - better than expected loss experience in the segment's domestic operations for multiple accident years;

• Commercial property (excluding PG&E subrogation recoveries) - better than expected loss experience in the segment's domestic operations for multiple accident years; and

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

*•*PG&E subrogation recoveries - $81 million of recoveries described above.

Bond & Specialty Insurance. Net unfavorable prior year reserve development in 2020 totaled $1 million, as higher than expected loss experience in the domestic general liability product line for management liability coverages for recent accident years was largely offset by better than expected loss experience in the surety product line for multiple accident years.

Personal Insurance. Net favorable prior year reserve development in 2020 totaled $443 million, primarily driven by $322 million of PG&E subrogation recoveries described above and better than expected loss experience in the segment's domestic operations in the automobile product line for recent accident years.

2019

In 2019, estimated claims and claim adjustment expenses incurred included $164 million of net unfavorable development for claims arising in prior years, including $60 million of net unfavorable prior year reserve development and $49 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net unfavorable prior year reserve development in 2019 totaled $258 million, primarily driven by the following:

• General liability (excluding asbestos and environmental) - higher than expected loss experience in the segment's domestic operations for primary and excess coverages for multiple accident years, including the impact for accident years 2009 and prior related to the enactment of legislation by a number of states that extended the statute of limitations for childhood sexual molestation claims;

• Commercial automobile - higher than expected loss experience in the segment's domestic operations for recent accident years;

• Asbestos reserves - an increase of $220 million, primarily in the segment's domestic general liability product line;

• Commercial multi-peril - higher than expected loss experience in the segment's domestic operations for recent accident years; and

• Environmental reserves - an increase of $76 million, primarily in the segment's domestic general liability product line,

Partially offset by:

• Workers' compensation - better than expected loss experience in the segment's domestic operations for multiple accident years; and

• Commercial property - better than expected loss experience in the segment's domestic operations for recent accident years.

Bond & Specialty Insurance. Net favorable prior year reserve development in 2019 totaled $65 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages and in the fidelity and surety product line for multiple accident years.

Personal Insurance. Net favorable prior year reserve development in 2019 totaled $133 million, primarily driven by better than expected loss experience in the segment's domestic operations in the automobile and homeowners and other product lines for recent accident years.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

2018

In 2018, estimated claims and claim adjustment expenses incurred included $406 million of net favorable development for claims arising in prior years, including $517 million of net favorable prior year reserve development and $49 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net favorable prior year reserve development in 2018 totaled $142 million, primarily driven by the following:

• Workers' compensation - better than expected loss experience in the segment's domestic operations for multiple accident years; and

• Commercial property - better than expected loss experience in the segment's domestic operations for recent accident years,

Partially offset by:

• Commercial automobile - higher than expected loss experience for recent accident years;

*•*Asbestos reserves - an increase of $225 million, primarily in the segment's domestic general liability product line;

• General liability (excluding asbestos and environmental) - higher than expected loss experience in the segment's domestic operations for both primary and excess coverages for multiple accident years; and

• Environmental reserves - an increase of $55 million, primarily in the segment's domestic general liability product line.

Bond & Specialty Insurance. Net favorable prior year reserve development in 2018 totaled $266 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages for multiple accident years.

Personal Insurance. Net favorable prior year reserve development in 2018 totaled $109 million, primarily driven by better than expected loss experience in the segment's domestic operations in the automobile product line for recent accident years.

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, 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

(at December 31, 2020, in millions)						Net Undiscounted Claims and Claim Adjustment Expense Reserves						Discount (Net of Reinsurance)						Subtotal: Net Claims and Claim Adjustment Expense Reserves						Reinsurance Recoverables on Unpaid Losses (4)						Claims and Claim Adjustment Expense Reserves
Business Insurance
General liability						$	8,438					$	(143)					$	8,295					$	891					$	9,186
Commercial property						879						—						879						384						1,263
Commercial multi-peril						4,109						—						4,109						245						4,354
Commercial automobile						3,607						—						3,607						283						3,890
Workers’ compensation (1)						16,454						(929)						15,525						717						16,242
Bond & Specialty Insurance
General liability						2,148						—						2,148						122						2,270
Fidelity and surety						439						—						439						5						444
Personal Insurance
Automobile						2,768						—						2,768						448						3,216
Homeowners (excluding Other)						1,405						—						1,405						172						1,577
International - Canada						737						—						737						25						762
Subtotal — claims and allocated claim adjustment expenses for the products presented in the development tables below						40,984						(1,072)						39,912						3,292						43,204
Other insurance contracts (2)						4,100						(5)						4,095						1,968						6,063
Unallocated loss adjustment expense reserves						2,240						—						2,240						13						2,253
Structured settlements (3)						—						—						—						2,911						2,911
Other						110						—						110						(31)						79
Total property-casualty						47,434						(1,077)						46,357						8,153						54,510
Accident and health						—						—						—						11						11
Total						$	47,434					$	(1,077)					$	46,357					$	8,164					$	54,521

---

(1)Net discount amount includes discount of $61 million on reinsurance recoverables for long-term disability and annuity claim payments.

(2)Primarily includes residual market, international (other than operations in Canada within the Personal Insurance segment) and runoff assumed reinsurance business.

(3)Includes structured settlements in cases where the Company did not receive a release from the claimant.

(4)Total reinsurance recoverables (on paid and unpaid losses) at December 31, 2020 were $8.35 billion.

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 (including the impact of subrogation recoveries from PG&E for accident years 2017 and 2018 in the commercial property, commercial multi-peril and homeowners and other product lines) by age, net of reinsurance, as supplementary information (identified as unaudited in the tables below). For Personal Insurance - International - Canada, 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).

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Business Insurance

General Liability

						(dollars in millions)
						For the Years Ended December 31,
						2011						2012						2013						2014						2015						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
						Unaudited
Accident Year																																																																		IBNR Reserves Dec 31, 2020						Cumulative Number of Reported Claims
2011						$	1,004					$	1,074					$	1,065					$	998					$	972					$	935					$	913					$	908					$	922					$	920					$	64					27,636
2012												989						985						935						913						892						905						917						920						941						77						24,995
2013																		965						975						958						940						927						933						975						975						92						22,711
2014																								976						989						983						948						956						1,013						988						127						22,465
2015																														998						956						923						967						1,057						1,087						145						21,531
2016																																				1,075						1,058						1,087						1,187						1,204						281						20,325
2017																																										1,133						1,143						1,196						1,234						410						18,736
2018																																																1,253						1,312						1,344						588						18,200
2019																																																						1,447						1,486						933						16,060
2020																																																												1,467						1,268						8,637
																																																						Total						$	11,646

						Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited
2011						$	47					$	187					$	355					$	539					$	660					$	725					$	762					$	799					$	819					$	826
2012												32						150						295						489						589						699						754						811						831
2013																		35						175						363						498						639						745						816						836
2014																								37						163						321						515						640						750						805						Liability for Claims
2015																														36						137						336						558						740						828						And Allocated Claim
2016																																				35						191						421						649						758						Adjustment Expenses,
2017																																										40						180						378						552						Net of Reinsurance
2018																																																42						202						441
2019																																																						51						233						2011 -						Before
2020																																																												61						2020						2011
																																																						Total						$	6,171					$	5,475					$	2,963
																																																												Total net liability												$	8,438

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5						6						7						8						9						10
						3.6		%				12.5		%				17.5		%				18.2		%				12.8		%				9.8		%				5.7		%				4.0		%				2.2		%				0.8		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Commercial Property

						(dollars in millions)
						For the Years Ended December 31,
						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
						Unaudited
Accident Year																																				IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
2016						$	896					$	863					$	820					$	809					$	813					$	14					22,337
2017												1,209						1,177						1,151						1,128						4						25,121
2018																		1,093						1,079						1,070						25						25,013
2019																								1,069						1,034						(6)						25,185
2020																														1,107						160						22,387
																								Total						$	5,152

						Cumulative Paid Claims and Allocated Claim
						Adjustment Expenses, Net of Reinsurance
						Unaudited
																																				Liability for Claims
Accident Year																																				And Allocated Claim
2016						$	441					$	685					$	745					$	767					$	780					Adjustment Expenses,
2017												618						1,003						1,073						1,094						Net of Reinsurance
2018																		561						928						981
2019																								610						957						2016 -						Before
2020																														580						2020						2016
																								Total						$	4,392					$	760					$	119
																														Total net liability												$	879

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5
						54.6		%				33.0		%				6.2		%				2.2		%				1.6		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Commercial Multi-Peril

						(dollars in millions)
						For the Years Ended December 31,
						2011						2012						2013						2014						2015						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
						Unaudited
Accident Year																																																																		IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
2011						$	2,235					$	2,244					$	2,269					$	2,286					$	2,296					$	2,287					$	2,283					$	2,279					$	2,272					$	2,272					$	24					125,994
2012												1,885						1,883						1,903						1,888						1,888						1,867						1,859						1,854						1,853						31						104,964
2013																		1,615						1,623						1,620						1,609						1,591						1,600						1,599						1,598						31						83,921
2014																								1,663						1,627						1,625						1,617						1,626						1,627						1,627						41						78,388
2015																														1,568						1,625						1,593						1,597						1,606						1,593						64						71,812
2016																																				1,662						1,623						1,598						1,590						1,601						95						69,213
2017																																										1,872						1,928						1,956						1,919						132						71,967
2018																																																1,976						2,114						2,092						245						69,513
2019																																																						2,017						2,087						467						64,425
2020																																																												2,142						856						59,815
																																																						Total						$	18,784

						Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited
2011						$	1,060					$	1,573					$	1,803					$	1,979					$	2,088					$	2,156					$	2,193					$	2,222					$	2,234					$	2,239
2012												795						1,246						1,424						1,590						1,699						1,752						1,780						1,804						1,811
2013																		644						987						1,167						1,304						1,410						1,475						1,516						1,532
2014																								628						956						1,154						1,328						1,448						1,512						1,544						Liability for Claims
2015																														595						970						1,144						1,310						1,409						1,452						And Allocated Claim
2016																																				585						950						1,133						1,278						1,373						Adjustment Expenses,
2017																																										716						1,199						1,388						1,531						Net of Reinsurance
2018																																																792						1,302						1,500
2019																																																						707						1,187						2011 -						Before
2020																																																												791						2020						2011
																																																						Total						$	14,960					$	3,824					$	285
																																																												Total net liability												$	4,109

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5						6						7						8						9						10
						38.8		%				23.0		%				10.6		%				9.0		%				6.1		%				3.3		%				1.9		%				1.2		%				0.5		%				0.2		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Commercial Automobile

						(dollars in millions)
						For the Years Ended December 31,
						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claims Adjustment
						Expenses, Net of Reinsurance
						Unaudited
Accident Year																																				IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
2016						$	1,278					$	1,303					$	1,371					$	1,409					$	1,417					$	52					183,313
2017												1,386						1,501						1,524						1,522						113						191,931
2018																		1,645						1,742						1,745						251						204,098
2019																								1,835						1,951						547						205,355
2020																														1,788						1,036						130,725
																								Total						$	8,423

						Cumulative Paid Claims and Allocated Claim
						Adjustment Expenses, Net of Reinsurance
						Unaudited
																																				Liability for Claims
Accident Year																																				And Allocated Claim
2016						$	412					$	688					$	931					$	1,158					$	1,265					Adjustment Expenses,
2017												456						746						1,027						1,226						Net of Reinsurance
2018																		515						848						1,159
2019																								539						934						2016 -						Before
2020																														437						2020						2016
																								Total						$	5,021					$	3,402					$	205
																														Total net liability												$	3,607

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5
						28.1		%				19.5		%				17.8		%				14.6		%				7.5		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Workers’ Compensation

						(dollars in millions)
						For the Years Ended December 31,
						2011						2012						2013						2014						2015						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
						Unaudited
Accident Year																																																																		IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
2011						$	2,284					$	2,303					$	2,347					$	2,350					$	2,379					$	2,385					$	2,363					$	2,348					$	2,320					$	2,295					$	285					137,116
2012												2,447						2,456						2,457						2,456						2,445						2,453						2,416						2,387						2,377						340						138,346
2013																		2,553						2,545						2,540						2,506						2,463						2,423						2,354						2,321						367						134,518
2014																								2,554						2,553						2,547						2,476						2,430						2,393						2,352						434						131,355
2015																														2,644						2,585						2,505						2,441						2,372						2,279						511						128,939
2016																																				2,768						2,690						2,569						2,473						2,372						569						123,652
2017																																										2,779						2,681						2,584						2,483						729						121,345
2018																																																2,744						2,687						2,599						922						122,416
2019																																																						2,680						2,714						1,023						118,868
2020																																																												2,559						1,690						86,459
																																																						Total						$	24,351

						Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited
2011						$	420					$	911					$	1,185					$	1,365					$	1,487					$	1,583					$	1,652					$	1,696					$	1,732					$	1,757
2012												443						940						1,217						1,394						1,536						1,629						1,689						1,735						1,768
2013																		458						954						1,237						1,413						1,525						1,604						1,659						1,700
2014																								455						944						1,224						1,399						1,505						1,581						1,634						Liability for Claims
2015																														430						893						1,154						1,310						1,411						1,470						And Allocated Claim
2016																																				421						873						1,118						1,272						1,367						Adjustment Expenses,
2017																																										433						890						1,154						1,314						Net of Reinsurance
2018																																																440						919						1,169
2019																																																						466						951						2011 -						Before
2020																																																												389						2020						2011
																																																						Total						$	13,519					$	10,832					$	5,622
																																																												Total net liability												$	16,454

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5						6						7						8						9						10
						17.9		%				19.8		%				11.2		%				7.2		%				4.9		%				3.5		%				2.5		%				1.9		%				1.5		%				1.1		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Bond & Specialty Insurance

General Liability

						(dollars in millions)
						For the Years Ended December 31,
						2011						2012						2013						2014						2015						2016						2017						2018						2019						2020
						Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
						Unaudited
Accident Year																																																																		IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
2011						$	565					$	596					$	639					$	632					$	601					$	545					$	520					$	508					$	506					$	504					$	2					5,219
2012												538						591						614						605						601						599						605						593						581						7						4,869
2013																		510						565						606						630						654						607						586						575						3						4,465
2014																								549						571						563						518						473						452						450						18						4,367
2015																														528						524						486						437						395						414						35						4,217
2016																																				512						511						504						520						514						53						4,371
2017																																										534						517						526						493						69						4,544
2018																																																530						548						585						150						4,693
2019																																																						588						653						317						4,992
2020																																																												772						598						3,450
																																																						Total						$	5,541

						Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited
2011						$	33					$	143					$	249					$	324					$	414					$	447					$	476					$	490					$	496					$	501
2012												38						160						255						342						383						419						436						453						459
2013																		34						154						252						352						400						434						451						462
2014																								38						150						239						312						367						407						418						Liability for Claims
2015																														38						141						234						310						338						348						And Allocated Claim
2016																																				30						141						233						313						378						Adjustment Expenses,
2017																																										38						155						262						340						Net of Reinsurance
2018																																																49						182						290
2019																																																						51						189						2011 -						Before
2020																																																												52						2020						2011
																																																						Total						$	3,437					$	2,104					$	44
																																																												Total net liability												$	2,148

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5						6						7						8						9						10
						7.3		%				22.5		%				19.4		%				16.2		%				10.9		%				6.0		%				3.5		%				2.5		%				1.1		%				1.0		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Fidelity and Surety

						(dollars in millions)
						For the Years Ended December 31,
						2016						2017						2018						2019						2020						IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
						Incurred Claims and Allocated Claims Adjustment
						Expenses, Net of Reinsurance
Accident Year						Unaudited
2016						$	226					$	239					$	205					$	208					$	215					$	13					892
2017												244						271						240						241						21						926
2018																		220						235						220						1						886
2019																								203						193						45						827
2020																														274						189						580
																								Total						$	1,143

						Cumulative Paid Claims and Allocated Claim
						Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited																														Liability for Claims
																																				And Allocated Claim
2016						$	54					$	121					$	142					$	149					$	174					Adjustment Expenses,
2017												70						166						194						205						Net of Reinsurance
2018																		64						171						202
2019																								49						121						2016 -						Before
2020																														50						2020						2016
																								Total						$	752					$	391					$	48
																														Total net liability												$	439

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5
						25.3		%				39.4		%				11.9		%				3.9		%				11.6		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Personal Insurance

Automobile

						(dollars in millions)
						For the Years Ended December 31,
						2016						2017						2018						2019						2020						IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
						Incurred Claims and Allocated Claims Adjustment
						Expenses, Net of Reinsurance
Accident Year						Unaudited
2016						$	2,779					$	2,791					$	2,772					$	2,752					$	2,745					$	14					922,219
2017												3,323						3,256						3,221						3,206						57						1,062,577
2018																		3,281						3,269						3,233						155						1,050,608
2019																								3,362						3,361						368						1,029,935
2020																														2,829						807						741,369
																								Total						$	15,374

						Cumulative Paid Claims and Allocated Claim
						Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited																														Liability for Claims
																																				And Allocated Claim
2016						$	1,610					$	2,203					$	2,466					$	2,616					$	2,686					Adjustment Expenses,
2017												1,912						2,575						2,887						3,046						Net of Reinsurance
2018																		1,889						2,582						2,880
2019																								1,933						2,650						2016 -						Before
2020																														1,571						2020						2016
																								Total						$	12,833					$	2,541					$	227
																														Total net liability												$	2,768

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5
						58.0		%				21.3		%				9.5		%				5.2		%				2.5		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

Homeowners (excluding Other)

						(dollars in millions)
						For the Years Ended December 31,
						2016						2017						2018						2019						2020						IBNR Reserves December 31, 2020						Cumulative Number of Reported Claims
						Incurred Claims and Allocated Claims Adjustment
						Expenses, Net of Reinsurance
Accident Year						Unaudited
2016						$	1,556					$	1,547					$	1,525					$	1,511					$	1,506					$	5					144,534
2017												2,312						2,340						2,343						2,170						27						170,114
2018																		2,610						2,574						2,381						32						187,093
2019																								2,297						2,344						65						179,977
2020																														3,019						737						192,501
																								Total						$	11,420

						Cumulative Paid Claims and Allocated Claim
						Adjustment Expenses, Net of Reinsurance
Accident Year						Unaudited																														Liability for Claims
																																				And Allocated Claim
2016						$	1,049					$	1,392					$	1,455					$	1,479					$	1,489					Adjustment Expenses,
2017												1,471						2,059						2,197						2,089						Net of Reinsurance
2018																		1,657						2,298						2,255
2019																								1,613						2,179						2016 -						Before
2020																														2,019						2020						2016
																								Total						$	10,031					$	1,389					$	16
																														Total net liability												$	1,405

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5
						68.6		%				25.2		%				2.9		%				(1.7)		%				0.6		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

International - Canada

						(dollars in millions)
						For the Years Ended December 31,																																																												IBNR Reserves December 31, 2020						Cumulative
						2011						2012						2013						2014						2015						2016						2017						2018						2019						2020									Number of
Accident						Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																																																															Reported
Year						Unaudited																																																															Claims
2011						$	467					$	445					$	453					$	449					$	441					$	434					$	429					$	424					$	414					$	415					$	(2)					55,789
2012												442						420						421						404						403						386						380						368						368						1						51,227
2013																		493						486						477						465						452						450						440						435						(4)						54,237
2014																								436						452						452						440						433						430						430						(6)						52,290
2015																														366						366						366						362						363						363						7						45,205
2016																																				367						416						416						426						426						8						45,759
2017																																										352						387						410						410						16						46,808
2018																																																447						469						471						33						50,558
2019																																																						452						447						60						47,945
2020																																																												353						132						28,763
																																																						Total						$	4,118

Accident						Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year						Unaudited
2011						$	179					$	253					$	285					$	319					$	355					$	377					$	396					$	404					$	408					$	412
2012												168						235						266						292						321						339						348						353						359
2013																		197						276						309						342						375						394						411						420
2014																								193						270						307						336						368						390						407						Liability for Claims
2015																														164						230						258						287						312						327						And Allocated Claim
2016																																				215						288						315						349						373						Adjustment Expenses,
2017																																										185						261						301						326						Net of Reinsurance
2018																																																222						310						346
2019																																																						219						294						2011 -						Before
2020																																																												146						2020						2011
																																																						Total						$	3,410					$	708					$	29
																																																									Total net liability															$	737

						Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
						Unaudited
Years						1						2						3						4						5						6						7						8						9						10
						45.7		%				17.9		%				8.0		%				7.5		%				7.3		%				4.7		%				3.7		%				1.7		%				1.3		%				0.9		%

The incurred and paid amounts have been translated from the local currency to U.S. dollars using the December 31, 2020 spot rate for all years presented in the table above in order to isolate changes in foreign exchange rates from loss development.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. 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 (IBNR) 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.

• 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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

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 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 generally recognizes one count per coverage per policy claim event and one count per bond per surety 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 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 roadside assistance coverage 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, 2020 and 2019, the Company’s claims and claim adjustment expense reserves included $1.65 billion and $1.60 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 with open claims at least annually. Among the factors the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

In the third quarter of 2020, the Company completed its annual in-depth asbestos claim review, including a review of policyholders with open claims and litigation cases for potential product and “non-product” liability, and noted the continuation of the following trends:

• a 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 high level of litigation activity; and

• a moderate level of asbestos-related bankruptcy activity.

The number of policyholders with open asbestos claims declined slightly while gross asbestos-related payments increased slightly, in each case when compared to 2019. Payments on behalf of these policyholders continue to be influenced by a 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, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders, and the assumed reinsurance component of reserves, as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves, and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment.

The completion of these reviews and analyses in 2020, 2019 and 2018 resulted in $295 million, $220 million and $225 million increases, respectively, to 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. The increase in the estimate of projected settlement and defense costs primarily resulted from payment trends that continue to be higher than previously anticipated due to the continued high level of mesothelioma claim filings and the impact of the current litigation environment surrounding those claims 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 2020, 2019 and 2018 were $237 million, $224 million and $225 million, respectively. Approximately 1%, 4% and 9% of total net paid losses in 2020, 2019 and 2018, respectively, related to policyholders with whom the Company entered into settlement agreements that limit those policyholders' ability to present future claims to the Company.

Environmental Reserves. In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties. In the course of its 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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

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.

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. These policyholders continue to present smaller exposures, are involved in fewer hazardous waste sites and are lower tier defendants than policyholders presenting such claims in the past. 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. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims as well as the costs associated with coverage litigation on environmental matters has been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. As a result of these factors, in 2020, 2019 and 2018, the Company increased its net environmental reserves by $54 million, $76 million and $55 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. Changes in the legal, regulatory and legislative environment may impact the future resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. Changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims, could affect the settlement of asbestos and environmental claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current 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 include hurricanes, tornadoes and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions, solar flares and other naturally-occurring events. Catastrophes can also result from terrorist attacks and other intentionally destructive acts including those involving nuclear, biological, chemical and radiological events, cyber events, civil unrest, explosions and destruction of infrastructure. 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, earthquakes, wildfires and cyber attacks 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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INSURANCE CLAIM RESERVES (Continued)

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.

9. DEBT

Debt outstanding was as follows:

(at December 31, in millions)						2020						2019
Short-term:
Commercial paper						$	100					$	100
3.90% Senior notes due November 1, 2020						—						500
Total short-term debt						100						600
Long-term:
7.75% Senior notes due April 15, 2026						200						200
7.625% Junior subordinated debentures due December 15, 2027						125						125
6.375% Senior notes due March 15, 2033						500						500
6.75% Senior notes due June 20, 2036						400						400
6.25% Senior notes due June 15, 2037						800						800
5.35% Senior notes due November 1, 2040						750						750
4.60% Senior notes due August 1, 2043						500						500
4.30% Senior notes due August 25, 2045						400						400
8.50% Junior subordinated debentures due December 15, 2045						56						56
3.75% Senior notes due May 15, 2046						500						500
8.312% Junior subordinated debentures due July 1, 2046						73						73
4.00% Senior notes due May 30, 2047						700						700
4.05% Senior notes due March 7, 2048						500						500
4.10% Senior notes due March 4, 2049						500						500
2.55% Senior notes due April 27, 2050						500						—
Total long-term debt						6,504						6,004
Total debt principal						6,604						6,604
Unamortized fair value adjustment						41						43
Unamortized debt issuance costs						(95)						(89)
Total debt						$	6,550					$	6,558

2020 Debt Issuance. On April 27, 2020, the Company issued $500 million aggregate principal amount of 2.55% senior notes that will mature on April 27, 2050. The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $490 million. Interest on the senior notes is payable semi-annually in arrears on April 27 and October 27. Prior to October 27, 2049, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excluding October 27, 2049 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 October 27, 2049, 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.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DEBT (Continued)

2020 Debt Repayment. On November 1, 2020, the Company's $500 million, 3.90% notes matured and were fully paid.

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

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

2018 Debt Issuance. On March 7, 2018, the Company issued $500 million aggregate principal amount of 4.05% senior notes that will mature on March 7, 2048. The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $491 million. Interest on the senior notes is payable semi-annually in arrears on March 7 and September 7. Prior to September 7, 2047, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excluding September 7, 2047 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 15 basis points. On or after September 7, 2047, 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.

2018 Debt Repayment. On May 15, 2018, the Company's $500 million, 5.80% senior notes matured and were fully paid.

Description of Debt

Commercial Paper—The Company maintains an $800 million commercial paper program. Interest rates on commercial paper issued in 2020 ranged from 0.12% to 1.62%, and in 2019 ranged from 1.58% to 2.48%.

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 three 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 junior 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, 2020 and 2019, respectively.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. DEBT (Continued)

The following table presents merger-related unamortized fair value adjustments and the related effective interest rate:

																		Unamortized Fair Value Purchase Adjustment at December 31,												Effective Interest Rate to Maturity
(in millions)						Issue Rate						Maturity Date						2020						2019
Junior subordinated debentures						7.625		%				Dec. 2027						$	10					$	11					6.147		%
						8.500		%				Dec. 2045						14						14						6.362		%
						8.312		%				Jul. 2046						17						18						6.362		%
Total																		$	41					$	43

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 Travelers Property Casualty Corp. (TPC) and Travelers Insurance Group Holdings Inc. (TIGHI). The guarantees pertain to the $200 million 7.75% notes due 2026 and the $500 million 6.375% notes due 2033.

Maturities—The Company has no senior notes or junior subordinated debentures that become due during the years 2021 through 2025.

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 4, 2023. Pursuant to the credit agreement covenants, the Company must maintain a minimum consolidated net worth, defined as shareholders’ equity determined in accordance with GAAP (excluding accumulated other comprehensive income (loss)) 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 $12.494 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, 2020, the Company was in compliance with these covenants. Generally, the cost of borrowing under this agreement will range from LIBOR plus 75 basis points to LIBOR plus 137.5 basis points, depending on the Company’s credit ratings. At December 31, 2020, that cost would have been LIBOR plus 100 basis points, had there been any amounts outstanding under the credit agreement. In the event that LIBOR is no longer available, the credit agreement provides that the Company and the syndicate of financial institutions use commercially reasonable efforts to jointly agree upon an alternate rate of interest.

Shelf Registration

The Company has a shelf registration statement filed with the Securities and Exchange Commission that expires on June 10, 2022 which permits it to issue securities from time to time at prices and on other terms to be determined at the time of offering.

10. SHAREHOLDERS’ EQUITY AND DIVIDEND AVAILABILITY

Authorized Shares

The number of authorized shares of the Company is 1.755 billion, consisting of five million shares 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.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. SHAREHOLDERS’ EQUITY AND DIVIDEND AVAILABILITY (Continued)

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.

Restricted Stock

In August 2020, 41,997 shares of restricted stock issued by the Company in August 2017 to certain employees of an acquired business vested and were distributed. The value of the shares was recognized over the vesting period and was included with the share-based compensation cost of awards that are issued under the Company’s share-based incentive compensation plan (see note 14).

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, changes in levels of written premiums, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. In April 2017, the Board of Directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity. During 2020, the Company repurchased 4.9 million shares under its share repurchase authorization, for a total of $625 million. The average cost per share repurchased was $127.17. At December 31, 2020, the Company had $1.16 billion of capacity remaining under its share repurchase authorization.

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 shares used by employees to cover the price of certain stock options that were exercised. During the years ended December 31, 2020 and 2019, the Company acquired $47 million and $48 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 $2.73 billion is available by the end of 2021 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 2021 and/or increase the amount of dividends from its insurance subsidiaries in 2021, 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 9.

TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company’s foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company's financial position or liquidity at December 31, 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. SHAREHOLDERS’ EQUITY AND DIVIDEND AVAILABILITY (Continued)

TRV and its two non-insurance holding company subsidiaries received dividends of $2.00 billion, $2.50 billion and $2.30 billion from their U.S. insurance subsidiaries in 2020, 2019 and 2018, respectively.

For the years ended December 31, 2020, 2019 and 2018, TRV declared cash dividends per common share of $3.37, $3.23 and $3.03, respectively, and paid cash dividends of $861 million, $844 million and $814 million, respectively.

Statutory Net Income and Statutory Capital and Surplus

Statutory net income of the Company’s domestic and international insurance subsidiaries was $2.98 billion, $2.74 billion and $2.61 billion for the years ended December 31, 2020, 2019 and 2018, respectively. Statutory capital and surplus of the Company’s domestic and international insurance subsidiaries was $22.18 billion and $21.33 billion at December 31, 2020 and 2019, respectively.

11. 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, 2020, 2019 and 2018.

						Changes in Net Unrealized Gains (Losses) on Investment Securities
(in millions)						Having No Credit Losses Recognized in the Consolidated Statement of Income						Having Credit Losses Recognized in the Consolidated Statement of Income						Net Benefit Plan Assets and Obligations Recognized in Shareholders’ Equity						Net Unrealized Foreign Currency Translation						Total Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2017						$	747					$	207					$	(686)					$	(611)					$	(343)
Cumulative effect of adoption of updated accounting guidance for equity financial instruments at January 1, 2018						(34)						—						—						—						(34)
Income tax benefit						(12)						—						—						—						(12)
Net of taxes						(22)						—						—						—						(22)
Reclassification of certain tax effects from accumulated other comprehensive income at January 1, 2018						145						7						(141)						(35)						(24)
Total effect of adoption of new guidance at January 1, 2018, net of tax						123						7						(141)						(35)						(46)
Other comprehensive income (loss) (OCI) before reclassifications, net of tax						(1,151)						(21)						(114)						(227)						(1,513)
Amounts reclassified from AOCI, net of tax						(25)						—						68						—						43
Net OCI, current period						(1,176)						(21)						(46)						(227)						(1,470)
Balance, December 31, 2018						(306)						193						(873)						(873)						(1,859)
OCI before reclassifications, net of tax						2,406						(4)						(14)						106						2,494
Amounts reclassified from AOCI, net of tax						(43)						—						41						7						5
Net OCI, current period						2,363						(4)						27						113						2,499
Balance, December 31, 2019						2,057						189						(846)						(760)						640
OCI before reclassifications, net of tax						1,876						(7)						(53)						21						1,837
Amounts reclassified from AOCI, net of tax						(41)						—						67						(1)						25
Net OCI, current period						1,835						(7)						14						20						1,862
Balance, December 31, 2020						$	3,892					$	182					$	(832)					$	(740)					$	2,502

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. 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)						2020						2019						2018
Changes in net unrealized gains (losses) on investment securities:
Having no credit losses recognized in the consolidated statement of income						$	2,331					$	2,994					$	(1,489)
Income tax expense (benefit)						496						631						(313)
Net of taxes						1,835						2,363						(1,176)
Having credit losses recognized in the consolidated statement of income						(9)						(4)						(27)
Income tax benefit						(2)						—						(6)
Net of taxes						(7)						(4)						(21)
Net changes in benefit plan assets and obligations						18						33						(56)
Income tax expense (benefit)						4						6						(10)
Net of taxes						14						27						(46)
Net changes in unrealized foreign currency translation						12						117						(247)
Income tax expense (benefit)						(8)						4						(20)
Net of taxes						20						113						(227)
Total other comprehensive income (loss)						2,352						3,140						(1,819)
Total income tax expense (benefit)						490						641						(349)
Total other comprehensive income (loss), net of taxes						$	1,862					$	2,499					$	(1,470)

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. 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)						2020						2019						2018
Reclassification adjustments related to unrealized gains (losses) on investment securities:
Having no credit losses recognized in the consolidated statement of income (1)						$	(52)					$	(55)					$	(32)
Income tax expense (2)						(11)						(12)						(7)
Net of taxes						(41)						(43)						(25)
Having credit losses recognized in the consolidated statement of income (1)						—						—						—
Income tax benefit (2)						—						—						—
Net of taxes						—						—						—
Reclassification adjustment related to benefit plan assets and obligations:
Claims and claim adjustment expenses (3)						35						21						35
General and administrative expenses (3)						50						31						51
Total						85						52						86
Income tax benefit (2)						18						11						18
Net of taxes						67						41						68
Reclassification adjustment related to foreign currency translation (1)						(1)						7						—
Income tax benefit (2)						—						—						—
Net of taxes						(1)						7						—
Total reclassifications						32						4						54
Total income tax (expense) benefit						7						(1)						11
Total reclassifications, net of taxes						$	25					$	5					$	43

---

(1)(Increases) decreases net realized investment gains on the consolidated statement of income.

(2)(Increases) decreases income tax expense on the consolidated statement of income.

(3)Increases (decreases) expenses on the consolidated statement of income.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. EARNINGS PER SHARE

Basic earnings per share was computed by dividing net 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 and excludes the effect of any anti-dilutive shares.

Potentially dilutive securities include restricted stock units, deferred stock units, stock options and performance share awards related to the employee share-based incentive compensation programs. The restricted stock units and deferred stock units contain non-forfeitable rights to dividends and are included as participating securities in the calculation of basic and diluted earnings per share using the two-class method. Stock option and performance share awards are included in the calculation of diluted earnings per share using the treasury stock method.

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)						2020						2019						2018
Basic and Diluted
Net income, as reported						$	2,697					$	2,622					$	2,523
Participating securities — allocated income						(19)						(19)						(19)
Net income available to common shareholders — basic and diluted						$	2,678					$	2,603					$	2,504
Common Shares
Basic
Weighted average shares outstanding						253.5						260.0						267.4
Diluted
Weighted average shares outstanding						253.5						260.0						267.4
Weighted average effects of dilutive securities:
Stock options and performance shares						1.1						2.3						2.4
Total						254.6						262.3						269.8
Net income Per Common Share						0
Basic						$	10.56					$	10.01					$	9.37
Diluted						$	10.52					$	9.92					$	9.28

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES

Components of Income Tax Expense

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)						2020						2019						2018
Composition of income tax expense included in the consolidated statement of income
Current expense:
Federal						$	532					$	546					$	424
Foreign						35						7						41
State						4						6						8
Total current tax expense						571						559						473
Deferred benefit:
Federal						(29)						(33)						(13)
Foreign						(2)						(10)						(22)
Total deferred tax benefit						(31)						(43)						(35)
Total income tax expense included in the consolidated statement of income						540						516						438
Composition of income tax expense (benefit) included in shareholders’ equity
Expense (benefit) relating to changes in the unrealized gain (loss) on investments, unrealized loss on foreign exchange and other items in other comprehensive income (loss)						490						641						(349)
Total income tax expense included in the consolidated financial statements						$	1,030					$	1,157					$	89

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)						2020						2019						2018
Income (loss) before income taxes
U.S.						$	3,095					$	3,211					$	3,039
Foreign						142						(73)						(78)
Total income before income taxes						3,237						3,138						2,961
Effective tax rate
Statutory tax rate						21		%				21		%				21		%
Expected federal income tax expense						680						659						622
Tax effect of:
Nontaxable investment income						(147)						(149)						(150)
Other, net						7						6						(34)
Total income tax expense						$	540					$	516					$	438
Effective tax rate						17		%				16		%				15		%

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

The Company paid income taxes of $578 million, $428 million and $408 million during the years ended December 31, 2020, 2019 and 2018, respectively. The current income tax payable was $131 million and $126 million at December 31, 2020 and 2019, respectively, and was included in other liabilities in the consolidated balance sheet.

Deferred Tax Liability

The net deferred tax liability comprises the tax effects of temporary differences related to the following assets and liabilities:

(at December 31, in millions)						2020						2019
Deferred tax assets
Claims and claim adjustment expense reserves						$	575					$	551
Unearned premium reserves						560						539
Compensation-related liabilities						110						97
Net operating losses						87						62
Other						180						181
Total gross deferred tax assets						1,512						1,430
Less: valuation allowance						21						27
Adjusted gross deferred tax assets						1,491						1,403
Deferred tax liabilities
Claims and claim adjustment expense reserve discounting (transition rule)						96						115
Deferred acquisition costs						445						427
Investments						1,225						781
Internally developed software						93						94
Depreciation						130						70
Other						60						53
Total gross deferred tax liabilities						2,049						1,540
Net deferred tax liability						$	558					$	137

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 net change in the valuation allowance for deferred tax assets was a decrease of $6 million in 2020, primarily driven by a $10 million decrease resulting from the sale of the Company's consolidated Brazilian subsidiary, partially offset by increases of $2 million in each of the Company's Canadian subsidiary and Republic of Ireland 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.

U.S. income taxes have not been recognized on any undistributed earnings that are intended to be permanently reinvested. Any potential U.S. income tax on these amounts is immaterial.

Net Operating Losses

For tax return purposes, as of December 31, 2020, the Company had net operating loss (NOL) carryforwards in the United States, Canada, the Republic of Ireland 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:

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. INCOME TAXES (Continued)

(in millions)						Amount						Year of expiration
United States						$	2					2035 - 2036
Canada						$	13					2035 - 2040
Republic of Ireland						$	138					None
United Kingdom						$	343					None

Uncertain Tax Positions

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2020 and 2019:

(in millions)						2020						2019
Balance at January 1						$	37					$	31
Additions for tax positions of prior years						16						8
Reductions for tax positions of prior years						—						—
Reductions based on tax positions related to current year						—						—
Expiration of statute of limitations						(4)						(2)
Balance at December 31						$	49					$	37

Included in the balances at December 31, 2020 and 2019 were $48 million and $34 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 $1 million and $3 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 could affect the annual effective tax rate depending on the year of deduction and tax rate at the time.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $0 million, $(1) million and $(10) million in interest, respectively. The Company had approximately $13 million accrued for the payment of interest at both December 31, 2020 and 2019.

The IRS is conducting an examination of the Company’s U.S. income tax returns for 2017 and 2018. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.

14. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. SHARE-BASED INCENTIVE COMPENSATION (Continued)

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 2019, 2017 and 2016, the Company’s shareholders authorized an additional 3.1 million, 2.5 million and 4.4 million shares of the Company’s common stock, respectively, for grant under the 2014 Incentive Plan. The following are not counted towards the combined 20.0 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 20.0 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, canceled, 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, committee chair fee and lead director fee, as applicable, 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 annual 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. 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 generally using the volatility of the week prior to the stock 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 of a U.S. Treasury bill with a term comparable to the expected option term for the same week used for measuring volatility. The following table provides information about options granted:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. SHARE-BASED INCENTIVE COMPENSATION (Continued)

(for the year ended December 31,)						2020						2019						2018
Assumptions used in estimating fair value of options on grant date
Expected term of stock options						6 years						6 years						6 years
Expected volatility of Company’s stock						15.73		%				15.47% - 15.91%						14.94		%
Weighted average volatility						15.73		%				15.48		%				14.94		%
Expected annual dividend per share						$3.28						$3.08 - $3.28						$2.88
Risk-free rate						1.37		%				1.70% - 2.54%						2.68		%
Additional information
Weighted average grant-date fair value of options granted (per share)						$	14.41					$	16.64					$	20.13
Total intrinsic value of options exercised during the year (in millions)						$	47					$	88					$	67

A summary of stock option activity under the 2014 Incentive Plan and the legacy plans as of and for the year ended December 31, 2020 is as follows:

Stock Options						Number						Weighted Average Exercise Price						Weighted Average Contractual Life Remaining						Aggregate Intrinsic Value ($ in millions)
Outstanding, beginning of year						9,063,274						$	113.93
Original grants						2,474,036						132.58
Exercised						(1,282,155)						91.75
Forfeited or expired						(179,397)						130.78
Outstanding, end of year						10,075,758						$	121.03					6.4 years						$	196
Vested at end of year (1)						7,648,987						$	117.47					5.9 years						$	176
Exercisable at end of year						4,636,354						$	107.71					4.3 years						$	152

---

(1)Represents awards for which the requisite service has been rendered, including those that are retirement eligible.

On February 2, 2021, the Company, under the 2014 Incentive Plan, granted 1,594,624 stock option awards with an exercise price of $139.83 per share. The fair value attributable to the stock option awards on the date of grant was $23.30 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 underlying shares of common stock are not issued until the vesting criteria is satisfied. In addition, members of 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, committee chair fees and lead director fees); 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. SHARE-BASED INCENTIVE COMPENSATION (Continued)

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 2019 and 2020, and 50% to 200% for awards granted in 2021), 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, 2020, 2019 and 2018 was $127 million, $130 million and $135 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, 2020 is as follows:

						Restricted and Deferred Stock Units												Performance Shares
Other Equity Instruments						Number						Weighted Average Grant-Date Fair Value						Number						Weighted Average Grant-Date Fair Value
Nonvested, beginning of year						1,137,661						$	128.59					668,747						$	132.76
Granted						569,747						131.74						370,410						132.58
Vested						(542,207)			(1)			124.33						(293,519)			(2)			140.85
Forfeited						(78,417)						131.93						(48,903)						131.88
Performance-based adjustment						—						—						27,256			(3)			132.80
Nonvested, end of year						1,086,784						$	132.12					723,991						$	129.45

---

(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 2018 through 2020.

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 285 at the beginning of the year and 394 at the end of the year and the number of nonvested dividend equivalent shares related to performance shares was 22,359 at the beginning of the year and 29,751 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 2, 2021, the Company, under the 2014 Incentive Plan, granted 908,986 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 541,687 shares and the performance share awards totaled 367,299 shares. The fair value per share attributable to the common stock awards on the date of grant was $139.83.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. SHARE-BASED INCENTIVE COMPENSATION (Continued)

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), generally the vesting 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 if the vesting terms are accelerated upon retirement. 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 3.5% to 4.5% 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, 2020, 2019 and 2018 was $148 million, $142 million and $140 million, respectively. Included in these amounts are compensation cost adjustments of $3 million, $2 million and $3 million, for the years ended December 31, 2020, 2019 and 2018, 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 $25 million, $26 million and $26 million for the years ended December 31, 2020, 2019 and 2018, respectively.

At December 31, 2020, there was $133 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. 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 $127 million, $213 million and $132 million in 2020, 2019 and 2018, respectively. The tax benefit for tax deductions from employee stock options exercised during 2020, 2019 and 2018 totaled $10 million, $18 million and $14 million, respectively.

15. 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 certain limited groups of legacy participants are covered by a prior traditional 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. 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)						Qualified Domestic Pension Plan												Nonqualified and Foreign Pension Plans												Total
			2020						2019						2020						2019						2020						2019
Change in projected benefit obligation:
Benefit obligation at beginning of year						$	3,954					$	3,444					$	241					$	215					$	4,195					$	3,659
Benefits earned						128						112						5						6						133						118
Interest cost on benefit obligation						109						134						5						7						114						141
Actuarial loss						336						451						20						19						356						470
Benefits paid						(201)						(187)						(11)						(11)						(212)						(198)
Amendment						—						—						1						—						1						—
Foreign currency exchange rate change						—						—						4						5						4						5
Benefit obligation at end of year						$	4,326					$	3,954					$	265					$	241					$	4,591					$	4,195
Change in plan assets:
Fair value of plan assets at beginning of year						$	4,270					$	3,771					$	115					$	103					$	4,385					$	3,874
Actual return on plan assets						562						686						8						10						570						696
Company contributions						—						—						9						8						9						8
Benefits paid						(201)						(187)						(11)						(11)						(212)						(198)
Foreign currency exchange rate change						—						—						4						5						4						5
Fair value of plan assets at end of year						4,631						4,270						125						115						4,756						4,385
Funded status of plan at end of year						$	305					$	316					$	(140)					$	(126)					$	165					$	190
Amounts recognized in the consolidated balance sheet consist of:
Accrued over-funded benefit plan assets						$	305					$	316					$	1					$	1					$	306					$	317
Accrued under-funded benefit plan liabilities						—						—						(141)						(127)						(141)						(127)
Total						$	305					$	316					$	(140)					$	(126)					$	165					$	190
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial loss						$	1,050					$	1,094					$	63					$	49					$	1,113					$	1,143
Prior service cost (benefit)						(2)						(3)						1						—						(1)						(3)
Total						$	1,048					$	1,091					$	64					$	49					$	1,112					$	1,140

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

						Postretirement Benefit Plans
(at and for the year ended December 31, in millions)						2020						2019
Change in projected benefit obligation:
Benefit obligation at beginning of year						$	171					$	203
Benefits earned						—						—
Interest cost on benefit obligation						4						7
Actuarial (gain) loss						5						(31)
Benefits paid						(10)						(9)
Foreign currency exchange rate change						1						1
Benefit obligation at end of year						$	171					$	171
Change in plan assets:
Fair value of plan assets at beginning of year						$	12					$	12
Actual return on plan assets						1						1
Company contributions						8						8
Benefits paid						(10)						(9)
Fair value of plan assets at end of year						11						12
Funded status of plan at end of year						$	(160)					$	(159)
Amounts recognized in the consolidated balance sheet consist of:
Accrued under-funded benefit plan liability						$	(160)					$	(159)
Amounts recognized in accumulated other comprehensive income consist of:
Net actuarial gain						$	(41)					$	(49)
Prior service benefit						(18)						(21)
Total						$	(59)					$	(70)

The total accumulated benefit obligation for the Company’s defined benefit pension plans was $4.40 billion and $4.05 billion at December 31, 2020 and 2019, respectively. The qualified domestic pension plan accounted for $4.15 billion and $3.82 billion of the total accumulated benefit obligation at December 31, 2020 and 2019, respectively, whereas the nonqualified and foreign plans accounted for $0.25 billion and $0.23 billion of the total accumulated benefit obligation at December 31, 2020 and 2019, respectively.

For pension plans with a projected benefit obligation in excess of plan assets, the aggregate projected benefit obligation was $250 million and $228 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $109 million and $100 million at December 31, 2020 and 2019, respectively. For pension plans with an accumulated benefit obligation in excess of plan assets, the aggregate accumulated benefit obligation was $239 million and $218 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $109 million and $100 million at December 31, 2020 and 2019, respectively. For postretirement benefit plans with an accumulated benefit obligation in excess of plan assets, the aggregate accumulated benefit obligation was $170 million and $171 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $11 million and $12 million at December 31, 2020 and 2019, respectively.

The $336 million and $451 million actuarial losses experienced in 2020 and 2019, respectively, for the qualified domestic pension plan were largely driven by the decrease in the assumed discount rate from the prior year that was used to determine the projected benefit obligation at December 31, 2020 and 2019, respectively.

The Company has discretion regarding whether to provide additional funding and when to provide such funding to its qualified domestic pension plan. In 2020, 2019 and 2018, there were no required contributions to the qualified domestic pension plan. In 2020 and 2019, the Company made no voluntary contributions to the qualified domestic pension plan. In 2018, the Company voluntarily made contributions totaling $200 million to the qualified domestic pension plan. There is no required contribution to the qualified domestic pension plan during 2021, and the Company has not determined whether or not additional

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

funding will be made during 2021. With respect to the Company’s foreign pension plans, there are no significant required contributions in 2021.

The following table summarizes the components of net periodic benefit cost (benefit) and other amounts recognized in other comprehensive income related to the benefit plans.

						Pension Plans																		Postretirement Benefit Plans
(for the year ended December 31, in millions)						2020						2019						2018						2020						2019						2018
Net Periodic Benefit Cost (Benefit):
Service cost						$	133					$	118					$	133					$	—					$	—					$	—
Non-service cost (benefit):
Interest cost on benefit obligation						114						141						126						4						7						7
Expected return on plan assets						(275)						(275)						(264)						—						(1)						—
Amortization of unrecognized:
Prior service benefit						(1)						(1)						(1)						(3)						(3)						(4)
Net actuarial (gain) loss						93						56						91						(4)						—						—
Total non-service cost (benefit)						(69)						(79)						(48)						(3)						3						3
Net periodic benefit cost (benefit)						64						39						85						(3)						3						3
Other Changes in Benefit Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
Prior service benefit						1						—						—						—						—						—
Net actuarial (gain) loss						61						49						160						4						(31)						(18)
Foreign currency exchange rate change						1						1						(1)						—						—						—
Amortization of prior service benefit						1						1						1						3						3						4
Amortization of net actuarial gain (loss)						(93)						(56)						(91)						4						—						—
Total other changes recognized in other comprehensive income						(29)						(5)						69						11						(28)						(14)
Total other changes recognized in net periodic benefit cost and other comprehensive income						$	35					$	34					$	154					$	8					$	(25)					$	(11)

The following table indicates the line items in which the respective service costs and non-service cost (benefit) are presented in the consolidated statement of income for the years ended December 31, 2020, 2019 and 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

						Pension Plans																		Postretirement Benefit Plans
(for the year ended December 31, in millions)						2020						2019						2018						2020						2019						2018
Service Cost:
Net investment income						$	1					$	1					$	1					$	—					$	—					$	—
Claims and claim adjustment expenses						55						48						54						—						—						—
General and administrative expenses						77						69						78						—						—						—
Total service cost						133						118						133						—						—						—
Non-Service Cost (Benefit):
Claims and claim adjustment expenses						(29)						(33)						(19)						(1)						1						1
General and administrative expenses						(40)						(46)						(29)						(2)						2						2
Total non-service cost (benefit)						(69)						(79)						(48)						(3)						3						3
Net periodic benefit cost (benefit)						$	64					$	39					$	85					$	(3)					$	3					$	3

Assumptions

The following table summarizes assumptions used with regard to the Company’s qualified and nonqualified domestic pension plans and the domestic postretirement benefit plans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

(at and for the year ended December 31,)						2020						2019
Assumptions used to determine benefit obligations
Discount rate:
Qualified domestic pension plan						2.60		%				3.28		%
Nonqualified domestic pension plan						2.44		%				3.17		%
Domestic postretirement benefit plan						2.27		%				3.09		%
Cash balance interest crediting rate						4.01		%				4.01		%
Future compensation increase rate						4.00		%				4.00		%
Assumptions used to determine net periodic benefit cost
Discount rate:
Qualified domestic pension plan:
Service cost						3.50		%				4.57		%
Interest cost						2.84		%				4.02		%
Nonqualified domestic pension plan:
Service cost						3.30		%				4.40		%
Interest cost						2.73		%				3.95		%
Domestic postretirement benefit plan:
Interest cost						2.67		%				3.90		%
Expected long-term rate of return on assets:
Pension plan						6.75		%				7.00		%
Postretirement benefit plan						4.00		%				4.00		%
Assumed health care cost trend rates
Following year:
Medical (before age 65)						6.75		%				7.00		%
Medical (age 65 and older)						7.75		%				8.25		%
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)						4.50		%				4.50		%
Year that the rate reaches the ultimate trend rate:
Medical (before age 65)						2026						2026
Medical (age 65 and older)						2027						2026

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.

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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

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.

Assets of the Company’s foreign pension plans are not significant.

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 primarily 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.

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.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

(at December 31, 2020, in millions)						Total						Level 1						Level 2						Level 3
Invested assets:
Fixed maturities
Obligations of states, municipalities and political subdivisions						$	27					$	—					$	27					$	—
Debt securities issued by foreign governments						30						—						30						—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						14						—						14						—
All other corporate bonds						712						—						712						—
Total fixed maturities						783						—						783						—
Mutual funds
Equity mutual funds						1,706						1,699						7						—
Bond mutual funds						949						946						3						—
Total mutual funds						2,655						2,645						10						—
Equity securities						1,171						1,171						—						—
Other investments						1						—						—						1
Cash and short-term securities
U.S. Treasury securities						—						—						—						—
Money market mutual funds						26						26						—						—
Other						120						28						92						—
Total cash and short-term securities						146						54						92						—
Total						$	4,756					$	3,870					$	885					$	1

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

(at December 31, 2019, in millions)						Total						Level 1						Level 2						Level 3
Invested assets:
Fixed maturities
Obligations of states, municipalities and political subdivisions						$	3					$	—					$	3					$	—
Debt securities issued by foreign governments						30						—						30						—
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities						30						—						30						—
All other corporate bonds						715						—						715						—
Total fixed maturities						778						—						778						—
Mutual funds
Equity mutual funds						1,585						1,578						7						—
Bond mutual funds						869						866						3						—
Total mutual funds						2,454						2,444						10						—
Equity securities						1,018						1,017						1						—
Other investments						2						—						—						2
Cash and short-term securities
U.S. Treasury securities						20						20						—						—
Money market mutual funds						27						27						—						—
Other						86						17						69						—
Total cash and short-term securities						133						64						69						—
Total						$	4,385					$	3,525					$	858					$	2

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 65% 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 $11 million and $12 million at December 31, 2020 and 2019, respectively, which are measured at fair value on a recurring basis. The assets are primarily corporate bonds, which are categorized as level 2 in the fair value hierarchy.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. PENSION PLANS, RETIREMENT BENEFITS AND SAVINGS PLANS (Continued)

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).

						Benefits Expected to be Paid
(in millions)						Pension Plans						Postretirement Benefit Plans
2021						$	264					$	11
2022						268						11
2023						276						12
2024						278						11
2025						278						11
2026 through 2030						1,411						52

Savings Plan

Substantially all U.S. domestic Company employees are eligible to participate in The Travelers 401(k) Savings Plan (the Savings Plan). Eligible employees can contribute to the Savings Plan, and the Company makes a matching contribution into the employee's Savings Plan account, subject to limitations described below. In addition, starting on January 1, 2020, when an eligible U.S. employee makes a payment toward his or her student loans, the Company makes a contribution of that amount into the employee’s Savings Plan account, subject to limitations described below. The total annual amount of the Company's matching contributions, student loan repayment contributions or a combination of both is the lesser of 5% of eligible pay or $7,000, which becomes 100% vested after three years of service. All Company contributions to the Savings Plan are 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 Savings Plan. The Company’s non-U.S. employees participate in separate savings plans. The total expense related to all of the savings plans was $132 million, $123 million and $118 million for the years ended December 31, 2020, 2019 and 2018, 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.

16. LEASES

The Company enters into lease agreements for real estate that is primarily used for office space in the ordinary course of business. These leases are accounted for as operating leases, whereby lease expense is recognized on a straight-line basis over the term of the lease, and a right-of-use asset and lease liability is recognized as part of other assets and other liabilities, respectively, in the consolidated balance sheet. See note 1 - Adoption of Accounting Standards - Leases for additional information regarding the accounting for leases.

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

Lease expense is included in general and administrative expenses in the consolidated statement of income. Additional information regarding the Company’s real estate operating leases is as follows:

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. LEASES (Continued)

(for the year ended December 31, in millions)						2020						2019
Lease cost
Operating leases						$	95					$	92
Short-term leases (1)						2						10
Lease expense						97						102
Less: sublease income (2)						—						—
Net lease cost						$	97					$	102
Other information on operating leases
Cash payments to settle a lease liability reported in cash flows						$	109					$	104
Right-of-use assets obtained in exchange for new lease liabilities						$	67					$	60
Weighted average discount rate						2.51		%				3.02		%
Weighted average remaining lease term						5.0 years						5.1 years

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(1) Leases with a term of twelve months or less are not recorded on the consolidated balance sheet.

(2) Sublease income consists of rent from third parties of office space and is recognized as part of other revenues in the consolidated statement of income.

Lease expense was $185 million for the year ended December 31, 2018 for real estate and other operating leases.

The following table presents the contractual maturities of the Company's lease liabilities:

(in millions)						Real Estate Lease Liability
2021						$	103
2022						86
2023						67
2024						50
2025						30
Thereafter						51
Total undiscounted lease payments						387
Less: present value adjustment						25
Operating lease liability						$	362

17. 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

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. CONTINGENCIES, COMMITMENTS AND GUARANTEES (Continued)

this regard, the Company employs dedicated specialists and comprehensive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances. Currently, it is not possible to predict legal outcomes and their impact on future loss development for claims and litigation relating to asbestos and environmental claims. Any such development could be affected by future court decisions and interpretations, as well as future changes, if any, in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves. In addition, the Company’s estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or changes in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s results of operations in future periods.

Other Proceedings Not Arising Under Insurance Contracts or Reinsurance Agreements

The Company is involved in other lawsuits, including lawsuits alleging extra-contractual damages relating to insurance contracts or reinsurance agreements, that do not arise under insurance contracts or reinsurance agreements. The legal costs associated with such lawsuits are expensed in the period in which the costs are incurred. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company’s results of operations or would have a material adverse effect on the Company’s financial position or liquidity.

Other Commitments and Guarantees

Commitments

Investment Commitments — The Company has unfunded commitments to private equity limited partnerships, real estate partnerships and others. These commitments totaled $1.76 billion and $1.66 billion at December 31, 2020 and 2019, 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, obligations arising from certain liabilities and any breach or failure to perform certain covenants with respect to the businesses being sold. 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 $351 million at December 31, 2020.

The Company also has contingent obligations for guarantees 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 related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at December 31, 2020, 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.

18. NONCASH INVESTING AND FINANCING ACTIVITIES

There were no material noncash financing or investing activities during the years ended December 31, 2020, 2019 and 2018.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

2020 (in millions, except per share amounts)						First Quarter						Second Quarter						Third Quarter						Fourth Quarter						Total
Total revenues						$	7,908					$	7,401					$	8,275					$	8,397					$	31,981
Total expenses						7,188						7,486						7,289						6,781						28,744
Income (loss) before income taxes						720						(85)						986						1,616						3,237
Income tax expense (benefit)						120						(45)						159						306						540
Net income (loss)						$	600					$	(40)					$	827					$	1,310					$	2,697
Net income (loss) per share (1):
Basic						$	2.34					$	(0.16)					$	3.24					$	5.13					$	10.56
Diluted						2.33						(0.16)						3.23						5.10						10.52
2019 (in millions, except per share amounts)						First Quarter						Second Quarter						Third Quarter						Fourth Quarter						Total
Total revenues						$	7,671					$	7,834					$	8,013					$	8,063					$	31,581
Total expenses						6,704						7,169						7,581						6,989						28,443
Income before income taxes						967						665						432						1,074						3,138
Income tax expense						171						108						36						201						516
Net income						$	796					$	557					$	396					$	873					$	2,622
Net income per share (1):
Basic						$	3.01					$	2.11					$	1.52					$	3.37					$	10.01
Diluted						2.99						2.10						1.50						3.35						9.92

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(1)Due to the use of an average number of shares for each quarter, the sum of the quarterly earnings per share may not equal the total earnings per share for the full year.