Consistent Delivery 2013 Annual Report and Form 10-K

Transcription

1 Consistent Delivery 2013 Annual Report and Form 10-K

2 We could not be more pleased with our performance in 2013 and the value we created for our shareholders. It is a testament to our great strength as underwriters on both sides of the balance sheet. Financial highlights At and for the year ended December 31. Dollar amounts in millions, except per share amounts Earned Premiums $ 22,637 $ 22,357 $ 22,090 $ 21,432 $ 21,418 Total Revenues $ 26,191 $ 25,740 $ 25,446 $ 25,112 $ 24,680 Operating Income $ 3,567 $ 2,441 $ 1,390 $ 3,043 $ 3,600 Net Income $ 3,673 $ 2,473 $ 1,426 $ 3,216 $ 3,622 Net Income Per Diluted Common Share $ 9.74 $ 6.30 $ 3.36 $ 6.62 $ 6.33 Total Investments $ 73,160 $ 73,838 $ 72,701 $ 72,722 $ 74,965 Total Assets $ 103,812 $ 104,938 $ 104,575 $ 105,631 $ 110,013 Shareholders Equity $ 24,796 $ 25,405 $ 24,477 $ 25,475 $ 27,415 Return On Equity 14.6% 9.8% 5.7% 12.1% 13.5% Operating Return On Equity 15.5% 11.0% 6.1% 12.5% 14.0% Book Value Per Share $ $ $ $ $ Dividends Per Share $ 1.96 $ 1.79 $ 1.59 $ 1.41 $ 1.23 The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property and casualty insurance for auto, home and business. The company s diverse business lines offer its global customers a wide range of coverage sold primarily through independent agents and brokers. A component of the Dow Jones Industrial Average, Travelers has more than 30,000 employees and operations in the United States and selected international markets.

3 2013 ANNUAL REPORT 3 To our shareholders Travelers had a terrific 2013 despite what remains a challenging business environment. We posted net income of approximately $3.7 billion, reflecting strong underlying underwriting margins across our business segments, continued contributions from favorable prior year reserve development, more modest catastrophe losses than in recent years and solid net investment income. We delivered record net income per diluted share of $9.74, up 55 percent from 2012, return on equity of 14.6 percent and an operating return on equity of 15.5 percent. We ended the year with a book value per share of $70.15, an increase of 4 percent over the prior year-end, and we returned more than $3 billion to our shareholders through share repurchases and dividends. Each of our business segments contributed to the company s profitability. Our Business Insurance GAAP combined ratio in 2013 improved 5.5 points to 91.9 percent from 2012, and we posted record high net written premiums of $12.2 billion, up 3 percent from Our Financial, Professional & International Insurance GAAP combined ratio of 84.3 percent in 2013 was essentially unchanged from 2012, and our Personal Insurance GAAP combined ratio in 2013 improved 13.0 points from 2012 to 88.9 percent. We could not be more pleased with our performance in 2013 and the value we created for our shareholders. It is a testament to our great strength as underwriters on both sides of the balance sheet.

4 4 TRAVELERS A decade of success It has been ten years since the insurance company you know today was formed by the merger of Travelers Property Casualty Corp. and The St. Paul Companies, Inc. Over the last decade, we have supported our customers and agents during a period in which the United States experienced some of the costliest natural catastrophes on record, as well as a deep recession precipitated by the global financial crisis. Strengthening our presence in Canada On Nov. 1, 2013, we completed our acquisition of The Dominion of Canada General Insurance Company, significantly strengthening our presence in Canada. Travelers and Dominion are a strong strategic fit with complementary businesses. Dominion s extensive distribution network and established customer base provide an exceptional platform for expanding the commercial lines business in Canada. Combining Travelers Canada s existing surety, management liability and commercial middle market portfolios with Dominion s small commercial and personal products creates an organization with significant product breadth and a balanced mix of businesses. The integrated organization will leverage enterprise competitive advantages, including underwriting expertise, sophisticated data and analytics, and leading claim and risk control capabilities. During this time, our focus on delivering top-tier operating return on equity by generating appropriate returns on our products has created significant shareholder value. From the beginning of 2005, the first full year after the merger, through the end of 2013, we have delivered an average annual operating return on equity of 13.1 percent, returned more than $27 billion in capital to our shareholders through dividends and share repurchases, and grown book value per share at a compound annual growth rate of 9 percent. Total return to shareholders over that period, including dividends reinvested, exceeded 200 percent. our focus on delivering top-tier operating return on equity by generating appropriate returns on our products has created signifi cant shareholder value. We will continue to take the steps that we believe will help us improve returns consistent with our long-held objective of producing mid-teens operating return on equity over time, the lens through which we view virtually every decision we make. Our strategy to improve profitability Our success in 2013 has its roots in initiatives we began to implement in 2010 when we made it our goal to increase the profitability of our products through thoughtful, appropriate rate gains and improved terms and conditions. The returns on many of our products had deteriorated over time due to generally declining pricing, higher losses arising from more volatile weather patterns and the impact of historically low interest rates. We leveraged our industry-leading data and analytics to improve the price and the terms and conditions of our products on a granular account-by-account or class-by-class basis and, importantly, we did so with the express intention of not disrupting our agents, brokers or customers.

5 2013 ANNUAL REPORT 5 Our success in 2013 has its roots in initiatives we began to implement in 2010 when we made it our goal to increase the profi tability of our products through thoughtful, appropriate rate gains and improved terms and conditions. As the following charts show, underlying underwriting gain (which excludes the impact of prior year reserve development and catastrophe losses) was approximately $1.3 billion in 2013 almost three times higher than in This dramatic rise more than offset the decline in net investment income resulting from lower yields. Consolidated performance Underlying Underwriting Gain Net Investment Income Committed to our communities We focus our giving primarily on education. We also help strengthen communities by fostering small business development, and supporting community developments and the arts to sustain vibrant communities. In addition, our employees contribute many thousands of volunteer hours. In 2013, Travelers and the Travelers Foundation gave more than $21 million to charitable and community organizations, for a total of more than $100 million over the last five years. Travelers EDGE, our signature education initiative, reached more than 3,200 underrepresented students during the year and provided 116 students with direct financial support. In order to achieve our return objective, we will continue to execute on this strategy to seek improved returns on our products particularly as we expect volatile weather to persist and interest rates to remain low. Looking ahead We are proud of our results in 2013, but we also understand that past achievements are no guarantee of future performance. We remain committed to underwriting fundamentals as we adapt to changes in the broader economic and business environment and address emerging risks in new and innovative ways. Our Small Business Risk Education program, in partnership with Valley Economic Development Center, Women s Business Development Center and Accion Chicago, provided workshops on risk management for 86 small businesses and helped more than 30 develop safety risk management plans. We have joined forces with Habitat for Humanity and the Insurance Institute for Business and Home Safety to help communities build fortified homes to better withstand future storms in coastal regions of the country.

6 6 TRAVELERS As a general matter, we insure the output of the economy. Consequently, our ability to grow our business is challenged in a low-growth economic environment. We are not going to respond by changing our approach to balancing risk and reward either in our underwriting or in our investment activities. Instead, we will continue to develop better products for our agents and customers, enhance services and capabilities, and invest in technology to increase efficiency and improve our customers experience. We will continue to be creative and inventive, bringing our data and analytics expertise and our significant resources to bear to help our agents and customers manage risk. Advocating for the industry The Travelers Institute provides thought leadership on critical issues facing our industry. The Small Business Big Opportunity initiative, now in its third year, brought public officials, small business owners and other thought leaders together in Chicago and Boston to elevate the dialogue around small business challenges and opportunities. The Institute s third annual Kicking Off Hurricane Preparedness Season symposium brought business owners and disaster preparedness professionals to the New York Stock Exchange to discuss lessons learned from Storm Sandy. We launched our Consumer Insurance Education Symposia Series in The program offers insights and information about insurance and personal safety to help people make informed decisions on how to protect their families and assets. The Institute screened Overdraft at more than 45 universities. This award-winning nonpartisan documentary, made possible by Travelers in collaboration with public television, highlights the national debt and its implications for individuals and U.S. competitiveness. We also will continue to look at attractive opportunities outside the United States. Our acquisition of Dominion last year was one such opportunity, and one that has given us an exceptional platform from which to expand our commercial lines business in Canada. We remain committed to underwriting fundamentals as we adapt to changes in the broader economic and business environment and address emerging risks in new and innovative ways. In the evolving and dynamic insurance industry, change can be rapid and dramatic as we have seen in the automobile insurance market and in the traditional reinsurance market, where alternative sources of capital have been introduced. Technology also has played an important role by altering the ways products are developed and distributed and by offering new methods for interacting with customers. To remain competitive in the face of change, we are constantly recalibrating. For example, the adoption of comparative rating technology by independent agents, customers changing expectations, and our efforts to raise rates had all meaningfully affected our new auto business volume. In response, in 2013 we introduced Quantum Auto 2.0, a more competitively priced product supported by significant expense reduction initiatives, which we developed with input from agents to meet the needs of a broader customer segment increasingly focused on value. We are very encouraged by initial market response. Remaining true to our core as underwriters who thoughtfully balance risk and reward, we will keep taking actions such as these to remain an industry leader and to continue to deliver shareholder value.

7 2013 ANNUAL REPORT 7 To remain competitive in the face of change, we are constantly recalibrating. The strong foundation we have built over 160 years is rooted in our commitment to our employees and the communities in which they, our customers and our agents live and work. Over the last five years, Travelers and Travelers Foundation have given more than $100 million to charitable and community organizations. We are pleased that for the seventh consecutive year, we were named to one of the Dow Jones Sustainability Indices in recognition of our business practices and our commitment to delivering meaningful contributions to our communities. We also are proud to have been recognized by both DiversityInc and G.I. Jobs magazines for initiatives that promote inclusion. I want to express my gratitude to all of the individuals who helped make this a tremendous year for Travelers. I am thankful for the incredible dedication and talent of our employees, the support and partnership of our agents and brokers, and the leadership and guidance of our Board of Directors. Jay S. Fishman Chairman and Chief Executive Officer Responding to the changing auto insurance market The way people buy personal auto insurance has changed dramatically in recent years. Consumers are making purchase decisions based primarily on price driven largely by price-focused advertising from many auto insurers, consumers access to pricing information online, and agents increasing reliance on comparative rating technology for price comparisons. Travelers launched Quantum Auto 2.0 in This new auto product offers more competitive pricing to a broader range of consumers. We believe it will help us compete more effectively in the marketplace and will strengthen our relationship with our independent agent partners. In fact, the product was developed in close collaboration with agents. Quantum Auto 2.0 was available in 18 states at the end of 2013, and we expect to roll it out to the majority of states in 2014.

8 8 TRAVELERS Travelers is organized into three business segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. For more information about Travelers and its products and services, visit travelers.com. Business Insurance 2013 net written premiums: $12.2 billion Business Insurance offers a broad array of property and casualty insurance products and services to its clients. They range from small Main Street businesses and midsized and specialty companies to Fortune 100 corporations. Business Insurance is organized into underwriting and marketing groups focused on particular markets, industries or product lines. Select Accounts primarily sells packaged property and casualty coverage to small businesses. Commercial Accounts markets a unique set of products that deliver specialized underwriting expertise, claim, and risk control services to midsized domestic companies with global exposures in over 20 targeted industry segments. In addition, business units in the Target Risk Underwriting group provide insurance products and services to address large property, inland marine, ocean marine, equipment breakdown and excess casualty risks. Business units in the Industry-Focused Underwriting and Specialized Distribution groups tailor coverage to various industries, including oil and gas, technology, agriculture, trucking and construction, as well as to the public sector. Financial, Professional & International Insurance 2013 net written premiums: $3.3 billion 1 Financial, Professional & International Insurance includes the Bond & Financial Products business and the International business. Bond & Financial Products provides a wide range of customers with bond and insurance products and risk management services. Coverages include performance, payment and commercial surety and fidelity bonds for construction and general commercial enterprises, as well as management liability and employment practices, fiduciary and professional liability coverages, primarily for U.S.-based businesses. In addition, the business provides traditional property and casualty coverages to financial institutions. The International business offers specialized insurance and risk management products and services, property and casualty insurance products, and management liability and professional liability coverages in Canada, the United Kingdom and the Republic of Ireland, and internationally through its operations at Lloyd s. The International business also provides personal and small commercial insurance and surety bonds in Canada. Travelers acquisition of Dominion closed Nov. 1, In addition, the company owns 49.5 percent of J. Malucelli Participações em Seguros e Resseguros S.A. (JMalucelli), its joint venture in Brazil. JMalucelli is currently the surety market leader in Brazil based on market share and also offers property and casualty insurance products. Personal Insurance 2013 net written premiums: $7.2 billion Personal Insurance s broad array of property and casualty insurance products allows individuals to choose insurance solutions for their unique and changing needs. Travelers primary auto and homeowners products are complemented by a suite of additional coverage offerings: umbrella, condominium, tenant, homesaver (dwelling fire), identity theft, valuable items, boat and yacht, and wedding/special events coverage. We offer our products and services through a network of approximately 11,500 independent agencies and through employee and affinity group and joint marketing arrangements. Customers can also contact us directly by phone, mobile device or at travelers.com. 1 Includes two months of Dominion premiums.

9 2013 ANNUAL REPORT 9 Management David E. Baker Senior Vice President, Chief Compliance Offi cer and Group General Counsel Scott C. Belden + Senior Vice President, Reinsurance D. Keith Bell Senior Vice President, Accounting Standards Jay S. Benet* + Vice Chairman and Chief Financial Offi cer Diane D. Bengston + Senior Vice President, Enterprise Human Resources Andy F. Bessette* + Executive Vice President and Chief Administrative Offi cer Robert Brody* + Executive Vice President, Claim Services Lisa M. Caputo* + Executive Vice President, Marketing and Communications James W. Chapman + President, First Party Business Group John P. Clifford Jr.* + Executive Vice President, Human Resources William E. Cunningham Jr.* + Executive Vice President, Business Insurance Smitesh Davé + Vice President and Chief Corporate Actuary Behram Dinshaw + Senior Vice President, Product Management Fred R. Donner + Senior Vice President and Chief Financial Offi cer, Business Insurance Irwin R. Ettinger* + Vice Chairman Jay S. Fishman* + Chairman and Chief Executive Offi cer Matthew S. Furman + Senior Vice President, Corporate Secretary and Group General Counsel, Corporate and Governance Marlyss J. Gage* + Senior Vice President and Chief Underwriting Offi cer William P. Hannon* + Executive Vice President, Enterprise Risk Management; Chief Risk Offi cer and Business Conduct Officer William H. Heyman* + Vice Chairman and Chief Investment Offi cer Bruce R. Jones + Senior Vice President, Enterprise Risk Management Patrick J. Kinney* + Executive Vice President, Field Management Michael F. Klein* + Executive Vice President, Middle Market Thomas M. Kunkel* + Executive Vice President, Bond & Financial Products Madelyn J. Lankton* + Executive Vice President and Chief Information Offi cer Patrick L. Linehan + Vice President, Corporate Communications Brian W. MacLean* + President and Chief Operating Offi cer William C. Malugen Jr. + President, National Accounts Gabriella Nawi + Senior Vice President, Investor Relations Maria Olivo* + Executive Vice President, Strategic Development and Corporate Treasurer Brian P. Reilly Senior Vice President and Chief Auditor Ellen M. Rizzo + Senior Vice President and Chief Financial Offi cer, Claim David D. Rowland + Executive Vice President, Fixed Income Douglas K. Russell + Senior Vice President and Corporate Controller Scott W. Rynda Senior Vice President, Corporate Tax Marc E. Schmittlein* + Executive Vice President, Select Accounts and Agribusiness Alan D. Schnitzer* + Vice Chairman, Financial, Professional & International Insurance and Field Management; Chief Legal Offi cer Richard D. Schug + Senior Vice President and Actuary Peter Schwartz Senior Vice President and Group General Counsel, Corporate Litigation Kevin C. Smith* + Executive Vice President, International Doreen Spadorcia* + Vice Chairman, Claim Services, Personal Insurance, Operations and Systems and Risk Control Kenneth F. Spence III* + Executive Vice President and General Counsel Gregory C. Toczydlowski* + Executive Vice President and President, Personal Insurance Julie A. Trowbridge-Dillman + Senior Vice President, Operations and Enterprise Business Intelligence and Analytics Glenn E. Westrick Vice President, Government Relations Joan K. Woodward* + Executive Vice President, Public Policy and President, The Travelers Institute Daniel T. H. Yin + Executive Vice President, Alternative Investments * Management Committee Member + Operating Committee Member

10 10 TRAVELERS Board of Directors Standing, from left to right Alan L. Beller Partner, Cleary Gottlieb Steen & Hamilton LLP Director since 2007 Thomas R. Hodgson Retired President and COO, Abbott Laboratories Director since 1997 William J. Kane Retired Audit Partner, Ernst & Young Director since 2012 Cleve L. Killingsworth Jr. Retired President and CEO, Blue Cross Blue Shield of Massachusetts, Inc. Director since 2007 John H. Dasburg* Chairman and CEO, ASTAR USA, LLC Director since 1994 Philip T. Ruegger III Retired Chairman, Simpson Thacher & Bartlett LLP Director since 2014 Donald J. Shepard Retired Chairman of the Executive Board and CEO, AEGON N.V. Director since 2009 Seated, from left to right Jay S. Fishman Chairman and CEO, Travelers Director since 2001 Patricia L. Higgins Retired President and CEO, Switch and Data Facilities, Inc. Director since 2007 Kenneth M. Duberstein Chairman and CEO, The Duberstein Group, Inc. Director since 1998 Laurie J. Thomsen Retired Partner and Co-Founder, Prism Venture Partners Director since 2004 Janet M. Dolan President, Act 3 Enterprises, LLC Retired President and CEO, Tennant Company Director since 2001 * Lead Independent Director Board Committees AUDIT Dasburg (Chair) Beller Dolan Higgins Hodgson Kane COMPENSATION Shepard (Chair) Duberstein Killingsworth Thomsen EXECUTIVE Fishman (Chair) Dasburg Duberstein Hodgson Killingsworth Shepard INVESTMENT AND CAPITAL MARKETS Killingsworth (Chair) Duberstein Shepard Thomsen NOMINATING AND GOVERNANCE Duberstein (Chair) Killingsworth Shepard Thomsen RISK Hodgson (Chair) Beller Dasburg Dolan Higgins Kane Ruegger

11 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2013 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Commission file number The Travelers Companies, Inc. (Exact name of registrant as specified in its charter) Minnesota (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 485 Lexington Avenue, New York, NY (Address of principal executive offices) (Zip Code) (917) (Registrant s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Act (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No As of June 30, 2013, the aggregate market value of the registrant s voting and non-voting common equity held by non-affiliates was $29,744,391,793. As of February 7, 2014, 352,327,135 shares of the registrant s common stock (without par value) were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant s Proxy Statement relating to the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. to

12 The Travelers Companies, Inc. Annual Report on Form 10-K For Fiscal Year Ended December 31, 2013 Item Number TABLE OF CONTENTS Part I Business A. Risk Factors B. Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Part II Market for Registrant s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management s Discussion and Analysis of Financial Condition and Results of Operations A. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure A. Controls and Procedures B. Other Information Part III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Part IV Exhibits and Financial Statement Schedules Signatures Index to Consolidated Financial Statements and Schedules Exhibit Index Page 2

13 PART I Item 1. BUSINESS The Travelers Companies, Inc. (together with its consolidated subsidiaries, the Company) is a holding company principally engaged, through its subsidiaries, in providing a wide range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. The Company is incorporated as a general business corporation under the laws of the state of Minnesota and is one of the oldest insurance organizations in the United States, dating back to The principal executive offices of the Company are located at 485 Lexington Avenue, New York, New York 10017, and its telephone number is (917) The Company also maintains executive offices in Hartford, Connecticut, and St. Paul, Minnesota. The term TRV in this document refers to The Travelers Companies, Inc., the parent holding company excluding subsidiaries. For a summary of the Company s revenues, operating income and total assets by reportable business segments, see note 2 of notes to the Company s consolidated financial statements. PROPERTY AND CASUALTY INSURANCE OPERATIONS The property and casualty insurance industry is highly competitive in the areas of price, service, product offerings, agent relationships and methods of distribution. Distribution methods include the use of independent agents, exclusive agents, direct marketing (including the use of toll-free numbers and the internet) and/or salaried employees. According to A.M. Best, there are approximately 1,300 property and casualty groups in the United States, comprising approximately 2,750 property and casualty companies. Of those groups, the top 150 accounted for approximately 92% of the consolidated industry s total net written premiums in The Company competes with both foreign and domestic insurers. In addition, several property and casualty insurers writing commercial lines of business, including the Company, offer products for alternative forms of risk protection in addition to traditional insurance products. These products include large deductible programs and various forms of self-insurance, some of which utilize captive insurance companies and risk retention groups. The Company s competitive position in the marketplace is based on many factors, including the following: premiums charged; contract terms and conditions; products and services offered; claim service; agent, broker and client relationships; local presence; geographic scope of business; overall financial strength; ratings assigned by independent rating agencies; experience and qualifications of employees; and technology and information systems. In addition, the marketplace is affected by available capacity of the insurance industry, as measured by policyholders surplus, and the availability of reinsurance. Industry capacity as measured by policyholders surplus expands and contracts primarily in conjunction with profit levels generated by the industry, less amounts returned to shareholders through dividends and share repurchases. Capital raised by debt and equity offerings may also increase policyholders surplus. 3

14 Pricing and Underwriting Pricing of the Company s property and casualty insurance products is generally developed based upon an estimation of expected losses, the expenses associated with producing, issuing and servicing business and managing claims, the time value of money related to the expected loss and expense cash flows, and a reasonable allowance for profit that considers the capital needed to support the Company s business. The Company has a disciplined approach to underwriting and risk management that over the long-term emphasizes product returns and profitable growth rather than premium volume or market share. The Company s insurance subsidiaries are subject to state laws and regulations regarding rate and policy form approvals. The applicable state laws and regulations establish standards in certain lines of business to ensure that rates are not excessive, inadequate, unfairly discriminatory, or used to engage in unfair price competition. The Company s ability to increase rates and the relative timing of the process are dependent upon each respective state s requirements, as well as the competitive market environment. Geographic Distribution The following table shows the geographic distribution of the Company s consolidated direct written premiums for the year ended December 31, 2013: State % of Total California % New York Texas Pennsylvania Florida New Jersey Illinois Massachusetts Georgia All other domestic(1) Total domestic International Consolidated total % (1) No other single state accounted for 3.0% or more of the total direct written premiums written in 2013 by the Company s domestic operations. Catastrophe Exposure The wide geographic distribution of the Company s property and casualty insurance operations exposes it to claims arising out of catastrophes. The Company uses various analyses and methods, including proprietary and third-party computer modeling processes, to continually monitor and analyze underwriting risks of business in natural catastrophe-prone areas and target risk areas for conventional terrorist attacks (defined as attacks other than nuclear, biological, chemical or radiological events). The Company relies, in part, upon this analysis to make underwriting decisions designed to manage its exposure on catastrophe-exposed business. For example, the Company has limited the writing of new property and homeowners business in some markets and has selectively taken underwriting actions on new and existing business. These underwriting actions on new and existing business include tightened underwriting standards, selective price increases and changes to deductibles specific to hurricane-, tornado-, wind- and hail-prone areas. See Item 7 Management s Discussion and Analysis of Financial Condition and Results of Operations Catastrophe Modeling and Changing Climate Conditions. 4

15 The Company also utilizes reinsurance to manage its aggregate exposures to catastrophes. See Reinsurance. The Company is organized into three reportable business segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. BUSINESS INSURANCE The Business Insurance segment offers a broad array of property and casualty insurance and insurance-related services to its clients primarily in the United States. Business Insurance is organized into the following six groups, which collectively comprise Business Insurance Core operations: Select Accounts provides small businesses with property and casualty products, including commercial multi-peril, commercial property, general liability, commercial auto and workers compensation insurance. Commercial Accounts provides mid-sized businesses with property and casualty products, including commercial multi-peril, commercial property, general liability, commercial auto and workers compensation insurance. National Accounts provides large companies with casualty products and services, including workers compensation, general liability and automobile liability, generally utilizing loss-sensitive products, on both a bundled and unbundled basis. National Accounts also includes the Company s commercial residual market business, which primarily offers workers compensation products and services to the involuntary market. Industry-Focused Underwriting. The following units provide targeted industries with differentiated combinations of insurance coverage, risk management, claims handling and other services: Construction serves a broad range of construction businesses, offering guaranteed cost products and loss sensitive programs structured to meet customer needs. Products offered include workers compensation, general liability and commercial auto coverages, and other risk management solutions. Technology serves small to large companies involved in telecommunications, information technology, medical technology and electronics manufacturing, offering a comprehensive portfolio of products and services. Products offered include commercial property, commercial auto, general liability, workers compensation, internet liability, technology errors and omissions coverages and global companion products. Public Sector Services provides insurance products and services to public entities including municipalities, counties, Indian Nation gaming organizations and selected special government districts such as water and sewer utilities. Products offered by this unit typically cover commercial property, commercial auto, general liability, professional liability and workers compensation exposures. Oil & Gas provides specialized property and liability products and services for customers involved in the exploration and production of oil and natural gas, including operators, drilling and well servicing contractors, supply companies and manufacturers that support upstream operations. Products offered include workers compensation, general liability, commercial auto, commercial property, control of well and other risk management solutions. Agribusiness serves small to medium-sized agricultural businesses, including farms, ranches, wineries and related operations. Products offered include property and liability coverages other than workers compensation. 5

16 Target Risk Underwriting. The following units serve commercial businesses requiring specialized product underwriting, claims handling and risk management services: National Property provides traditional and customized property insurance programs to large and mid-sized customers, including office building owners, manufacturers, municipalities and schools, retailers and service businesses. Inland Marine provides insurance for goods in transit and movable objects for customers such as jewelers, museums, contractors and the transportation industry. Builders risk insurance is also offered to customers during the construction, renovation or repair of buildings and other structures. Ocean Marine serves the marine transportation industry and related services, as well as other businesses involved in international trade. The Company s product offerings in this unit fall under six main coverage categories: marine liability, cargo, hull and machinery, protection and indemnity, pleasure craft, and marine property and liability. Excess Casualty serves small to mid-sized commercial businesses, offering mono-line umbrella and excess coverage where the Company typically does not write the primary casualty coverage or where other business units within the Company prefer to access the underwriting expertise and/or limit capacity of the Excess Casualty business unit. Boiler & Machinery serves small to large companies, offering comprehensive breakdown coverages for equipment, including property and business interruption coverages. Through the BoilerRe unit, Boiler & Machinery also serves other property and casualty carriers that do not have in-house expertise with reinsurance, underwriting, engineering, claim handling and risk management services for this type of coverage. Global Partner Services provides insurance to foreign organizations with property and liability exposures located in the United States (reverse-flow) as part of a global program. Specialized Distribution. The following units market and underwrite their products to customers predominantly through licensed wholesale agents and program managers that manage customers unique insurance requirements: Northland provides insurance coverage for the commercial transportation industry, as well as commercial liability and commercial property policies for small, difficult to place specialty classes of commercial business, primarily on an excess and surplus lines basis. National Programs offers tailored property and casualty programs on an admitted basis for customers with common risk characteristics or coverage requirements. Programs available include, but are not limited to, those for entertainment, architects and engineers, equipment rental, golf services and owners of franchised businesses. Business Insurance also includes the Special Liability Group (which manages the Company s asbestos and environmental liabilities) and the assumed reinsurance and certain other runoff operations, which are collectively referred to as Business Insurance Other. 6

17 Selected Market and Product Information The following table sets forth Business Insurance net written premiums by market and product line for the periods indicated. For a description of the markets and product lines referred to in the table, see Principal Markets and Methods of Distribution and Product Lines, respectively. % of Total (for the year ended December 31, in millions) By market: Select Accounts... $ 2,724 $ 2,775 $ 2, % Commercial Accounts... 3,197 3,101 2, National Accounts... 1, Industry-Focused Underwriting... 2,645 2,554 2, Target Risk Underwriting... 1,799 1,666 1, Specialized Distribution Total Business Insurance Core... 12,233 11,873 11, Business Insurance Other... (1) 10 Total Business Insurance by market... $12,233 $11,872 $11, % By product line: Workers compensation... $ 3,642 $ 3,400 $ 2, % Commercial automobile... 1,897 1,924 1, Commercial property... 1,748 1,647 1, General liability... 1,823 1,765 1, Commercial multi-peril... 3,083 3,100 3, Other Total Business Insurance by product line... $12,233 $11,872 $11, % Principal Markets and Methods of Distribution Business Insurance distributes its products through approximately 10,500 independent agencies and brokers located throughout the United States that are serviced by 116 field offices and three customer service centers. Business Insurance continues to make significant investments in enhanced technology utilizing internet-based applications to provide real-time interface capabilities with independent agencies and brokers. Business Insurance builds relationships with well-established, independent insurance agencies and brokers. In selecting new independent agencies and brokers to distribute its products, Business Insurance considers, among other attributes, each agency s or broker s financial strength, staff experience and strategic fit with the Company s operating and marketing plans. Once an agency or broker is appointed, Business Insurance carefully monitors its performance. The majority of products offered by the Select Accounts, Commercial Accounts, Industry-Focused Underwriting and Target Risk Underwriting groups are distributed through a common base of independent agents and brokers, many of whom also sell the Company s Personal Insurance products. Additionally, the Industry-Focused Underwriting and Target Risk Underwriting groups may underwrite business with agents that specialize in servicing the needs of certain of the industries served by these groups. Select Accounts is a leading provider of commercial property and casualty insurance products to small businesses, generally with fewer than 50 employees. Products offered by Select Accounts are guaranteed-cost policies, including packaged products covering property and liability exposures. Each small business risk is independently evaluated via an automated underwriting platform which in turn enables agents to quote, bind and issue a substantial amount of new small business risks at their desktop in an efficient manner that significantly reduces the time period between quoting a price on a new policy and issuing that policy. Risks with more complex characteristics are underwritten with the assistance of Company personnel. The automated underwriting platform has significantly streamlined 7

18 the agent desktop underwriting process. Select Accounts has established a strong marketing relationship with its distribution network and has provided this network with defined underwriting policies, a broad array of products and competitive prices. In addition, the Company has established centralized service centers to help agents perform many service functions, in return for a fee. Commercial Accounts sells a broad range of commercial property and casualty insurance products through a large network of independent agents and brokers, primarily targeting mid-sized businesses with 50 to 1,000 employees. The Company offers a full line of products to its Commercial Accounts customers with an emphasis on guaranteed cost programs. Each account is underwritten based on the unique risk characteristics, loss history and coverage needs of the account. The ability to underwrite at this detailed level allows Commercial Accounts to have a broad risk appetite and a diversified customer base. National Accounts sells a variety of casualty products and services to large companies through a network of national and regional brokers, primarily utilizing loss-sensitive products in connection with a large deductible or self-insured program and, to a lesser extent, a retrospectively rated or a guaranteed cost insurance policy. National Accounts also provides casualty products and services through retail brokers on an unbundled basis, using third-party administrators for insureds who utilize programs such as collateralized deductibles, captive reinsurers and self-insurance. National Accounts provides insurance-related services, such as risk management services, claims administration, loss control and risk management information services, either in addition to, or in lieu of, pure risk coverage, and generated $229 million of fee income in 2013, excluding commercial residual market business. The commercial residual market business of National Accounts sells claims and policy management services to workers compensation pools throughout the United States, and generated $111 million in fee income in National Accounts services approximately 34% of the total workers compensation assigned risk market, making the Company one of the largest servicing carriers in the industry. Workers compensation accounted for approximately 75% of sales to National Accounts customers during 2013, based on direct written premiums and fees. Industry-Focused Underwriting markets commercial property and casualty insurance products and services through a large network of agents and brokers. These products and services are tailored to targeted industry segments of significant size and complexity that require unique underwriting, claim, risk management or other insurance-related products and services. Target Risk Underwriting markets commercial property and casualty insurance products and services through a large network of agents and brokers to a wide customer base having specialized property and casualty coverage requirements. Specialized Distribution distributes admitted as well as excess and surplus lines property and casualty products predominantly through selected wholesale agents and program managers, both on a brokerage and delegated authority underwriting basis. These brokers, wholesale agents and program managers operate in certain markets that are not typically served by the Company s appointed retail agents, or they maintain certain affinity arrangements in specialized market segments. The wholesale excess and surplus lines market, which is characterized by the absence of rate and form regulation, allows for more flexibility to write certain classes of business. In working with wholesale agents or program managers on a brokerage basis, Specialized Distribution underwrites the business and sets the premium level. In working with wholesale agents or program managers with delegated underwriting authority, the agents produce and underwrite business subject to underwriting guidelines that have been specifically designed for each facility or program. 8

19 Pricing and Underwriting Business Insurance utilizes underwriting, claims, engineering, actuarial and product development disciplines for particular industries, in conjunction with extensive amounts of proprietary data gathered and analyzed over many years, to facilitate its risk selection process and develop pricing parameters. The Company utilizes both standard industry forms and proprietary forms for the insurance policies it issues. A portion of business in this segment, particularly in National Accounts and Construction, is written with large deductible insurance policies. Under workers compensation insurance contracts with deductible features, the Company is obligated to pay the claimant the full amount of the claim. The Company is subsequently reimbursed by the contractholder for the deductible amount and is subject to credit risk until such reimbursement is made. At December 31, 2013, contractholder payables on unpaid losses within the deductible layer of large deductible policies and the associated receivables were each approximately $4.31 billion. Business Insurance also utilizes retrospectively rated policies for another portion of the business, primarily for workers compensation coverage. Although the retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it introduces additional credit risk to the Company. Premium receivables from holders of retrospectively rated policies totaled approximately $99 million at December 31, Significant collateral, primarily letters of credit and, to a lesser extent, cash collateral or trusts, is generally obtained for large deductible plans and/or retrospectively rated policies that provide for deferred collection of deductible recoveries and/or ultimate premiums. The amount of collateral requested is predicated upon the creditworthiness of the customer and the nature of the insured risks. Business Insurance continually monitors the credit exposure on individual accounts and the adequacy of collateral. Product Lines The Business Insurance segment writes the following types of coverages: Workers Compensation. Provides coverage for employers for specified benefits payable under state or federal law for workplace injuries to employees. There are typically four types of benefits payable under workers compensation policies: medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The Company emphasizes managed care cost containment strategies, which involve employers, employees and care providers in a cooperative effort that focuses on the injured employee s early return to work and cost-effective quality care. The Company offers the following types of workers compensation products: guaranteed-cost insurance products, in which policy premium charges are fixed for the period of coverage and do not vary as a result of the insured s loss experience; loss-sensitive insurance products, including large deductible and retrospectively rated policies, in which fees or premiums are adjusted based on actual loss experience of the insured during the policy period; and service programs, which are generally sold to the Company s National Accounts customers, where the Company receives fees rather than premiums for providing loss prevention, risk management, and claim and benefit administration services to organizations under service agreements. The Company also participates in state assigned risk pools as a servicing carrier and pool participant. Commercial Automobile. Provides coverage for businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured s vehicle and property 9

20 damage to other vehicles and other property resulting from the ownership, maintenance or use of automobiles and trucks in a business. Commercial Property. Provides coverage for loss of or damage to buildings, inventory and equipment from a variety of events, including, among others, hurricanes and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, volcanic eruptions, tsunamis, theft, vandalism, fires, explosions, terrorism and financial loss due to business interruption resulting from covered property damage. For additional information on terrorism coverages, see Reinsurance Catastrophe Reinsurance Terrorism Risk Insurance Program. Property also includes specialized equipment insurance, which provides coverage for loss or damage resulting from the mechanical breakdown of boilers and machinery, and ocean and inland marine insurance, which provides coverage for goods in transit and unique, one-of-a-kind exposures. General Liability. Insures businesses against third-party claims arising from accidents occurring on their premises or arising out of their operations, including as a result of injuries sustained from products sold. Specialized liability policies may also include coverage for directors and officers liability arising in their official capacities, employment practices liability insurance, fiduciary liability for trustees and sponsors of pension, health and welfare, and other employee benefit plans, errors and omissions insurance for employees, agents, professionals and others arising from acts or failures to act under specified circumstances, as well as umbrella and excess insurance. Commercial Multi-Peril. Provides a combination of the property and liability coverages described in the foregoing product line descriptions. Net Retention Policy The following discussion reflects the Company s retention policy with respect to the Business Insurance segment as of January 1, For third-party liability, Business Insurance generally limits its net retention, through the use of reinsurance, to a maximum of $18.8 million per insured, per occurrence. The net retained amount per risk for property exposures is generally limited to $20.0 million per occurrence, after reinsurance. The Company generally retains its workers compensation exposures. Reinsurance treaties often have aggregate limits or caps which may result in larger net per-risk retentions if the aggregate limits or caps are reached. The Company utilizes facultative reinsurance to provide additional limits capacity or to reduce retentions on an individual risk basis. The Company may also retain amounts greater than those described herein based upon the individual characteristics of the risk. 10