Travelers 2011 Annual Report Download - page 132

offset by operating cash flows of $2.17 billion and a $1.57 billion increase in net pretax unrealized
appreciation of investments.
On June 17, 2011, the Company acquired 43% of the common stock of J. Malucelli Participa¸c˜ oes
em Seguros e Resseguros S.A, a Brazilian company (‘‘JMalucelli’’). JMalucelli is currently the market
leader in surety in Brazil based on market share. The Company’s investment was approximately
$410 million in U.S. dollars, which was funded with cash provided internally from an operating
subsidiary of the Company. The Company has an option to increase its interest in JMalucelli up to
49.9% within 18 months from the date of the consummation of the transaction.
The primary goals of the Company’s asset—liability management process are to satisfy the
insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash
flows. Generally, the expected principal and interest payments produced by the Company’s fixed
maturity portfolio adequately fund the estimated runoff of the Company’s insurance reserves. Although
this is not an exact cash flow match in each period, the substantial amount by which the market value
of the fixed maturity portfolio exceeds the expected present value of the net insurance liabilities, as
well as the positive cash flow from newly sold policies and the large amount of high quality liquid
bonds, contributes to the Company’s ability to fund claim payments without having to sell illiquid assets
or access credit facilities.
Financing Activities
Net cash flows used in financing activities were $3.31 billion, $5.22 billion and $3.44 billion in 2011,
2010 and 2009, respectively. The totals in each year reflected common share repurchases, dividends to
shareholders and the repayment of debt, partially offset by the proceeds from employee stock option
exercises and, in 2010 and 2009, the issuance of debt.
Debt Transactions.
2011. On June 1, 2011, the Company repaid the remaining $9 million principal balance on its
7.22% real estate non-recourse debt.
2010. On November 1, 2010, the Company issued $500 million aggregate principal amount 3.90%
senior notes that will mature on November 1, 2020, and $750 million aggregate principal amount 5.35%
senior notes that will mature on November 1, 2040. The net proceeds of these issuances, after original
issuance discount and the deduction of underwriting expenses and commissions and other expenses,
were approximately $496 million and $738 million, respectively. Interest on the senior notes is payable
semi-annually in arrears on November 1 and May 1 of each year. The senior notes are redeemable in
whole at any time or in part from time to time, at the Company’s option, at a redemption price equal
to the greater of (a) 100% of the principal amount of senior notes to be redeemed or (b) the sum of
the present values of the remaining scheduled payments of principal and interest on the 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) plus 15 basis points for the 2020 senior notes and 20 basis
points for the 2040 notes.
Prior to November 2010, the Company was subject to a replacement capital covenant that it had
granted to the holders of its 6.75% senior notes due June 20, 2036 (the senior notes). The replacement
capital covenant restricted the Company’s ability to repurchase its $1.00 billion in outstanding 6.25%
fixed-to-floating rate junior subordinated debentures due March 15, 2067 (the debentures). In
November 2010, the Company paid approximately $4 million to holders of the senior notes to
terminate the replacement capital covenant. Following the termination, the Company purchased
approximately $885 million aggregate principal amount of the debentures. A $60 million pretax loss was
recognized in 2010 related to these transactions.
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