Travelers : Reports Third Quarter Net Income per Diluted Share of $2.69, Up 17% from Prior Year Quarter

The Travelers Companies, Inc. today reported net income of $919 million, or $2.69 per diluted share, for the quarter ended September 30, 2014, compared to net income of $864 million, or $2.30 per diluted share, in the prior year quarter. Operating income in the current quarter was $893 million, or $2.61 per diluted share, compared to $883 million, or $2.35 per diluted share, in the prior year quarter. The increase in net and operating income compared to the prior year quarter primarily resulted from higher net investment income and lower catastrophe losses, partially offset by lower net favorable prior year reserve development and a slightly lower underlying underwriting gain (i.e., excluding net favorable prior year reserve development and catastrophe losses), which was impacted by higher non-catastrophe weather-related losses. Net income also benefited from higher net realized investment gains while per diluted share amounts also benefited from the impact of share repurchases.

“We are very pleased with our results this quarter,” commented Jay Fishman, Chairman and Chief Executive Officer. “Our results were driven by strong underwriting performance across all of our business segments, as reflected in our consolidated combined ratio of 90.0%, and higher investment returns driven by private equity performance. Our return on equity and per share results continue to benefit meaningfully from our ongoing strategy of returning excess capital to shareholders. Year-to-date, total capital returned to shareholders was almost $2.9 billion, including over $2.3 billion in share repurchases and $553 million in dividends.

“In addition to these strong financial results, we were also very pleased with our production metrics this quarter. Within Business and International Insurance, once again, we improved retention in our domestic businesses from already strong levels in recent quarters, while continuing to achieve meaningful rate and exposure increases. Bond & Specialty Insurance improved profitability from already high levels, and continued to achieve positive renewal premium change while maintaining strong retention. In Personal Insurance, Auto net written premiums were up 3% from the prior year quarter and policies in force were up 1% from the most recent quarter as a result of the very successful introduction of Quantum 2.0 beginning last fall.

“As we continue to face persistently low interest rates and uncertain weather patterns, we remain focused on delivering superior profitability and returns on equity. Consequently, we remain committed to our highly segmented pricing and underwriting strategies, executing on an account by account or class by class basis.”

Third Quarter 2014 Results

(All comparisons vs. third quarter 2013, unless noted otherwise)

Net income of $919 million after-tax increased $55 million, or 6%, due to an increase in both net realized investment gains and operating income. Current period net realized investment gains resulted from the sale of substantially all of one of the company’s real estate joint venture investments. Operating income of $893 million after-tax increased $10 million, or 1%, primarily driven by higher net investment income and a continued strong, but lower, underwriting gain.

Underwriting results

• The combined ratio increased 1.1 points to 90.0% as the benefit of lower catastrophe losses (0.3 points) was more than offset by lower net favorable prior year reserve development (0.9 points) and a higher underlying combined ratio (0.5 points).
• The underlying combined ratio increased 0.5 points to 90.5% as the benefit of earned pricing that exceeded loss cost trends was more than offset by higher non-catastrophe weather-related losses.
• Net favorable prior year reserve development occurred in all segments. Catastrophe losses were primarily due to wind and hail storms in several regions of the United States, as well as increases in estimated losses related to wind and hail storms that occurred in the second quarter.

Net investment income of $568 million after-tax ($719 million pre-tax) increased due to strong private equity performance, partially offset by lower reinvestment rates in the fixed income portfolio.

Net written premiums of $6.033 billion increased 6% primarily due to the inclusion of Dominion and domestic business insurance growth within Business and International Insurance.

Year-to-Date 2014 Results

(All comparisons vs. year-to-date 2013, unless noted otherwise)

Net income of $2.654 billion after-tax decreased $31 million, or 1%, due to lower net realized investment gains. Prior period net realized investment gains related to a short position in U.S. Treasury futures contracts. Operating income of $2.618 billion after-tax increased $32 million, or 1%, driven by higher net investment income and a higher underwriting gain, partially offset by a decline in other income due to the inclusion of a benefit in the prior year period of a $91 million pre-tax favorable legal settlement, as well as the inclusion in the prior year period of a $63 million benefit from a favorable tax settlement. The current period operating income included a $49 million after-tax benefit recorded in the first quarter resulting from a reduction in the estimated liability for state assessments to be paid by the company related to workers’ compensation premiums.

Underwriting results

• The combined ratio improved 0.3 points to 90.3% due to an improved underlying combined ratio (0.9 points), partially offset by higher catastrophe losses (0.5 points) and lower net favorable prior year reserve development (0.1 points).
• The underlying combined ratio improved 0.9 points to 89.9% as the benefits of earned pricing that exceeded loss cost trends and an improved expense ratio were partially offset by higher non-catastrophe weather-related losses. The expense ratio benefited from the above mentioned reduction in the estimated liability for state assessments.
• Net favorable prior year reserve development occurred in all segments. Catastrophe losses were primarily due to wind, hail and winter storms in several regions in the United States.

Net investment income of $1.703 billion after-tax ($2.150 billion pre-tax) increased primarily due to strong private equity performance and higher real estate partnership returns, partially offset by lower reinvestment rates in the fixed income portfolio.

Net written premiums of $18.068 billion increased 5% primarily due to the inclusion of Dominion and domestic business insurance growth within Business and International Insurance.

Shareholders’ Equity

Shareholders’equity of $25.321 billion decreased 1% and increased 2%, respectively, from the end of second quarter 2014 and year-end 2013. Included in shareholders’ equity were after-tax net unrealized investment gains of $1.914 billion, compared to $2.013 billion at the end of second quarter 2014 and $1.322 billion at year-end 2013. Book value per share of $76.42 increased 1% and 9%, respectively, from the end of second quarter 2014 and year-end 2013, while adjusted book value per share of $70.64 increased 2% and 6%, respectively, from the end of second quarter 2014 and year-end 2013.

The company repurchased 8.1 million shares during the third quarter and 26.1 million shares year-to-date at a total cost of $751 million and $2.332 billion, respectively. The company has $2.484 billion of remaining capacity under its existing share repurchase authorization. At the end of third quarter 2014, statutory surplus was $21.005 billion and the ratio of debt-to-capital (excluding after-tax net unrealized investment gains) was 21.3%, well within the company’s target range of 15% to 25%.

The Board of Directors has declared a quarterly dividend today of $0.55 per share. This dividend is payable on December 31, 2014 to shareholders of record as of the close of business on December 10, 2014.

Third Quarter 2014 Results

(All comparisons vs. third quarter 2013, unless noted otherwise)

Operating income of $552 million after-tax decreased $14 million, or 2%, as higher net investment income was more than offset by a lower underwriting gain.

Underwriting results

• The combined ratio increased 2.5 points to 95.2% as the benefit of lower catastrophe losses (0.9 points) was more than offset by a higher underlying combined ratio (1.7 points) and lower net favorable prior year reserve development (1.7 points).
• The underlying combined ratio increased 1.7 points to 94.9% as the benefit of earned pricing that exceeded loss cost trends was more than offset by higher non-catastrophe weather-related losses.

• Net favorable prior year reserve development resulted from (i) a $162 million pre-tax benefit related to better than expected loss experience related to, and the commutation of reinsurance treaties associated with, a workers’ compensation reinsurance pool for accident years 1996 and prior and (ii) better than expected loss experience in the general liability product line for accident years 2009 through 2012 as well as the property product line for accident years 2012 and 2013, partially offset by (iii) a $250 million pre-tax increase to asbestos reserves, and (iv) a $77 million pre-tax increase to unallocated loss adjusted expense (ULAE) reserves for the accrual of interest resulting from a court decision received in the third quarter, for which the associated settlement amount had been previously included in our asbestos reserves.

• The asbestos reserve strengthening, which resulted from our annual in-depth asbestos claim review that was completed in the third quarter, was driven by increases in the company’s estimate for projected settlement and defense costs related to a broad number of policyholders. The increase in the estimate of projected settlement and defense costs resulted from recent payment trends that were higher than previously anticipated. While the overall view of the underlying asbestos environment is essentially unchanged from recent periods, there remains a high degree of uncertainty with respect to future exposure from asbestos claims.

Net written premiums of $3.560 billion increased 10% primarily driven by the inclusion of Dominion. Domestic net written premiums of $3.079 billion increased 2% driven by continued positive renewal premium changes. Retention remained strong and improved from recent quarters.

Year-to-Date 2014 Results

(All comparisons vs. year-to-date 2013, unless noted otherwise)

Operating income of $1.717 billion after-tax decreased $56 million, or 3%, as higher net investment income was more than offset by a decline in other income due to the inclusion of a benefit in the prior year period of a $91 million pre-tax favorable legal settlement, the inclusion in the prior year period of a $43 million benefit from a favorable tax settlement, as well as a lower underwriting gain. The current period operating income included a $49 million after-tax benefit recorded in the first quarter resulting from a reduction in the estimated liability for state assessments to be paid by the company related to workers’ compensation premiums.

Underwriting results

• The combined ratio increased 0.9 points to 94.2% as the benefit of an improved underlying combined ratio (0.8 points) was more than offset by lower net favorable prior year reserve development (1.3 points) and higher catastrophe losses (0.4 points).
• The underlying combined ratio improved 0.8 points to 92.4% as the benefits of earned pricing that exceeded loss cost trends and an improved expense ratio were partially offset by higher non-catastrophe weather-related losses. The expense ratio benefited from the above mentioned reduction in the estimated liability for state assessments.

• Net favorable prior year reserve development resulted from (i) better than expected loss experience in the general liability product line for accident years 2012 and prior as well as the property product line for accident years 2010 through 2013, (ii) a $162 million pre-tax benefit resulting from better than expected loss experience related to, and the commutation of reinsurance treaties associated with, a workers’ compensation reinsurance pool, partially offset by (iii) a $250 million pre-tax increase to asbestos reserves, (iv) an $87 million pre-tax increase to environmental reserves, (v) a $77 million pre-tax increase to unallocated loss adjusted expense (ULAE) reserves for the accrual of interest resulting from a court decision received in the third quarter, for which the associated settlement amount had been previously included in our asbestos reserves, and (vi) higher than expected loss experience related to the liability coverages in the commercial multi-peril product line for accident years 2010 through 2013.

Net written premiums of $11.061 billion increased 9% primarily driven by the inclusion of Dominion. Domestic net written premiums of $9.484 billion increased 1% driven by continued positive renewal premium changes and high retention levels.

Third Quarter 2014 Results

(All comparisons vs. third quarter 2013, unless noted otherwise)

Operating income of $165 million after-tax increased $45 million, or 38%, primarily due to a higher underwriting gain.

Underwriting results

• The combined ratio improved 12.5 points to 66.9% primarily due to higher net favorable prior year reserve development (8.4 points), an improved underlying combined ratio (4.0 points) and lower catastrophe losses (0.1 points).
• The underlying combined ratio improved 4.0 points to 81.7% primarily driven by lower reinsurance costs and the benefit of earned pricing that exceeded loss cost trends.
• Net favorable prior year reserve development primarily resulted from better than expected loss experience in the contract surety product line for accident years 2009 through 2011.

Bond & Specialty Insurance net written premiums of $556 million increased 1%.

Year-to-Date 2014 Results

(All comparisons vs. year-to-date 2013, unless noted otherwise)

Operating income of $511 million after-tax increased $112 million, or 28%, primarily due to a higher underwriting gain. The prior year period operating income included a $15 million after-tax favorable tax settlement.

Underwriting results

• The combined ratio improved 12.1 points to 64.6% due to higher net favorable prior year reserve development (8.5 points) and an improved underlying combined ratio (3.7 points), partially offset by higher catastrophe losses (0.1 points).
• The underlying combined ratio improved 3.7 points to 81.5% primarily driven by lower reinsurance costs and the benefit of earned pricing that exceeded loss cost trends.
• Net favorable prior year reserve development primarily resulted from better than expected loss experience in the contract surety product line for accident years 2007 through 2011.

Bond & Specialty Insurance net written premiums of $1.578 billion increased 7% as a result of lower reinsurance costs and higher business volumes in Surety.

Third Quarter 2014 Results

(All comparisons vs. third quarter 2013, unless noted otherwise)

Operating income of $239 million after-tax decreased $23 million, or 9%, as the benefit of a higher underlying underwriting gain was more than offset by lower net favorable prior year reserve development and higher catastrophe losses.

Underwriting results

• The combined ratio increased 1.4 points to 86.1% as an improved underlying combined ratio (1.3 points) was more than offset by lower net favorable prior year reserve development (1.9 points) and higher catastrophe losses (0.8 points).

• The underlying combined ratio improved 1.3 points to 84.0% primarily due to the benefits of earned pricing that exceeded loss cost trends, the company’s previously announced expense reduction initiatives and lower homeowners’ commission expense, partially offset by the impact of higher new business.

• Net favorable prior year reserve development resulted from better than expected loss experience in Homeowners & Other for accident years 2011 through 2013 related to catastrophe losses.

Personal Insurance net written premiums of $1.917 billion were slightly above the prior year period, due to increased new business from the company’s new auto product, Quantum 2.0.

Year-to-Date 2014 Results

(All comparisons vs. year-to-date 2013, unless noted otherwise)

Operating income of $582 million after-tax decreased $19 million, or 3%, as higher net investment income was more than offset by a lower underwriting gain. The prior year period operating income included a $5 million after-tax favorable tax settlement.

Underwriting results

• The combined ratio increased 0.3 points to 89.8% as an improved underlying combined ratio (1.1 points) was more than offset by higher catastrophe losses (1.1 points) and lower net favorable prior year reserve development (0.3 points).

• The underlying combined ratio improved 1.1 points to 87.1% due to the benefits of earned pricing that exceeded loss cost trends, lower homeowners’ commission expenses and the company’s previously announced expense reduction initiatives partially offset by higher non-catastrophe weather-related losses and the impact of higher new business.

• Net favorable prior year reserve development resulted from better than expected loss experience in Homeowners & Other, primarily driven by better than expected loss experience for accident year 2013 for non-catastrophe weather-related losses and for accident years 2011 through 2013 for catastrophe losses.

Personal Insurance net written premiums of $5.429 billion decreased 1%.

Financial Supplement and Conference Call

The information in this press release should be read in conjunction with a financial supplement that is available on our website at www.travelers.com. Travelers management will discuss the contents of this release and other relevant topics via webcast at 9 a.m. Eastern (8 a.m. Central) on Tuesday, October 21, 2014. Investors can access the call via webcast at http://investor.travelers.com or by dialing 1-800-754-1382 within the U.S. and 1-212-231-2932 outside the U.S. (use passcode 14788 for both the U.S. and international calls). Prior to the webcast, a slide presentation pertaining to the quarterly earnings will be available on the company's website.

Following the live event, an audio playback of the webcast and the slide presentation will be available at the same website. An audio playback can also be accessed by phone at 1-800-633-8284 within the U.S. and 1-402-977-9140 outside the U.S. (use reservation 21733237 for both the U.S. and international calls).

About Travelers

The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $26 billion in 2013. For more information, visit www.travelers.com.

From time to time, Travelers may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material company information. Financial and other important information regarding the company is routinely accessible through and posted on our website at http://investor.travelers.com, our Facebook page at https://www.facebook.com/travelers and our Twitter account (@TRV_Insurance) at https://twitter.com/TRV_Insurance. In addition, you may automatically receive email alerts and other information about Travelers when you enroll your email address by visiting the “Email Alert Service” section at http://investor.travelers.com.

Travelers is organized into the following reportable business segments:

Business and International Insurance: The Business and International Insurance segment offers a broad array of property and casualty insurance and insurance related services to its clients, 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.

Bond & Specialty Insurance: The Bond & Specialty Insurance segment includes surety and financial liability coverages, which primarily use credit-based underwriting processes, and provide a wide range of primarily domestic customers with bond and insurance products and risk management services.

Personal Insurance: The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals’ personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.

On June 10, 2014, the company announced a realignment of its management team, effective July 1, 2014, that gave rise to a realignment of two of its three reportable business segments. The company’s International Insurance group, which had previously been included in the Financial, Professional & International Insurance segment, was combined with the company’s previous Business Insurance segment to create a new Business and International Insurance segment. The Bond & Financial Products group, which comprised the remaining businesses in the Financial, Professional & International Insurance segment, now comprises the new Bond & Specialty Insurance segment. The Personal Insurance segment was not impacted by these changes. The realignment of segments described above was made to reflect the realignment of the company’s senior management responsibilities and the manner in which the company’s businesses have been managed starting July 1, 2014, and the aggregation of products and services based on the type of customer, how the business is marketed and the manner in which risks are underwritten. In connection with these changes, the company has realigned and revised the names of several businesses that comprise the Business and International Insurance segment.

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Forward-Looking Statement

This press release contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may”, “will”, “should”, “likely”, “anticipates”, “expects”, “intends”, “plans”, “projects”, “believes”, “estimates” and similar expressions are used to identify these forward-looking statements. Specifically, statements about the company’s outlook, share repurchase plans, expected margin improvement, potential returns, future pension plan contributions and the potential impact of investment markets and other economic conditions on the company’s investment portfolio and underwriting results, among others, are forward looking, and the company may also make forward-looking statements about, among other things:

• its results of operations and financial condition (including, among other things, premium volume, premium rates, net and operating income, investment income and performance, loss costs, return on equity, and expected current returns and combined ratios);
• the sufficiency of the company’s asbestos and other reserves;
• the impact of emerging claims issues as well as other insurance and non-insurance litigation;
• the cost and availability of reinsurance coverage;
• catastrophe losses;
• the impact of investment, economic and underwriting market conditions; and
• strategic initiatives, including initiatives, such as in Personal Insurance, to improve profitability and competitiveness.

The company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Some of the factors that could cause actual results to differ include, but are not limited to, the following:

• catastrophe losses could materially and adversely affect the company’s results of operations, its financial position and/or liquidity, and could adversely impact the company’s ratings, the company’s ability to raise capital and the availability and cost of reinsurance;
• during or following a period of financial market disruption or economic downturn, the company’s business could be materially and adversely affected;
• if actual claims exceed the company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, the company’s financial results could be materially and adversely affected;
• the company’s investment portfolio may suffer reduced returns or material realized or unrealized losses;
• the company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
• the company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;
• the effects of emerging claim and coverage issues on the company’s business are uncertain;
• the intense competition that the company faces could harm its ability to maintain or increase its business volumes and profitability;
• the company may not be able to collect all amounts due to it from reinsurers and reinsurance coverage may not be available to the company in the future at commercially reasonable rates or at all;
• the company is exposed to credit risk in certain of its business and investment operations including reinsurance or structured settlements;
• within the United States, the company’s businesses are heavily regulated by the states in which it conducts business, including licensing and supervision, and changes in regulation may reduce the company’s profitability and limit its growth;
• changes in state or federal regulations or enforcement practices could impose significant burdens on the company and otherwise adversely impact the company’s results;
• a downgrade in the company’s claims-paying and financial strength ratings could adversely impact the company’s business volumes, adversely impact the company’s ability to access the capital markets and increase the company’s borrowing costs;
• the inability of the company’s insurance subsidiaries to pay dividends to the company’s holding company in sufficient amounts would harm the company’s ability to meet its obligations, pay future shareholder dividends or make future share repurchases;
• disruptions to the company’s relationships with its independent agents and brokers could adversely affect the company;
• the company’s efforts to develop new products, such as Quantum 2.0, or expand in targeted markets may not be successful and may create enhanced risks;
• the company may be adversely affected if its pricing and capital models provide materially different indications than actual results;
• the company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology;
• if the company experiences difficulties with technology, data security and/or outsourcing relationships, the company’s ability to conduct its business could be negatively impacted;
• the company is subject to a number of risks associated with its business outside the United States;
• new regulations outside of the United States, including in the European Union, could adversely impact the company’s results of operations and limit its growth;
• loss of or significant restriction on the use of particular types of underwriting criteria, such as credit scoring, in the pricing and underwriting of the company’s products could reduce the company’s future profitability;
• acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;
• the company could be adversely affected if its controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;
• the company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;
• intellectual property is important to the company’s business, and the company may be unable to protect and enforce its own intellectual property or the company may be subject to claims for infringing on the intellectual property of others;
• changes to existing accounting standards may adversely impact the company’s reported results;
• changes in U.S. tax laws or in the tax laws of other jurisdictions in which the company operates could adversely impact the company; and
• the company’s repurchase plans depend on a variety of factors, including the company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the company’s desired ratings from independent rating agencies, funding of the company’s qualified pension plan, capital requirements of the company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.

Our forward-looking statements speak only as of the date of this press release or as of the date they are made, and we undertake no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the captions "Risk Factors" in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 13, 2014 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent annual report on Form 10-K as updated by our current report on Form 8-K filed with the SEC on September 10, 2014 and our quarterly report on Form 10-Q filed with the SEC.

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GLOSSARY OF FINANCIAL MEASURES AND RECONCILIATIONS OF NON-GAAP MEASURES TO GAAP MEASURES

The following measures are used by the company’s management to evaluate financial performance against historical results and establish targets on a consolidated basis. In some cases, these measures are considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the consolidated financial statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. Reconciliations of non-GAAP measures to their most directly comparable GAAP measures also follow.

In the opinion of the company’s management, a discussion of these measures provides investors, financial analysts, rating agencies and other financial statement users with a better understanding of the significant factors that comprise the company’s periodic results of operations and how management evaluates the company’s financial performance. Internally, the company's management uses these measures to evaluate performance against historical results, to establish financial targets on a consolidated basis and for other reasons, which are discussed below.

Some of these measures exclude net realized investment gains (losses), net of tax, and/or net unrealized investment gains (losses), net of tax, which can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends.

Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by the company’s management.

RECONCILIATION OF OPERATING INCOME AND CERTAIN OTHER NON-GAAP MEASURES TO NET INCOME

Operating income is net income excluding the after-tax impact of net realized investment gains (losses) and discontinued operations. Management uses operating income to analyze each segment’s performance and as a tool in making business decisions. Financial statement users also consider operating income when analyzing the results and trends of insurance companies. Operating earnings per share is operating income on a per common share basis.

RECONCILIATION OF ADJUSTED SHAREHOLDERS’ EQUITY TO SHAREHOLDERS’ EQUITY AND OPERATING RETURN ON EQUITY TO RETURN ON EQUITY

Average shareholders’ equity is (a) the sum of total shareholders’ equity excluding preferred stock at the beginning and end of each of the quarters for the period presented divided by (b) the number of quarters in the period presented times two. Adjusted shareholders’ equity is shareholders’ equity excluding net unrealized investment gains (losses), net of tax, net realized investment gains (losses), net of tax, for the period presented, preferred stock and discontinued operations. Adjusted average shareholders’ equity is average shareholders’ equity excluding net unrealized investment gains (losses), net of tax, for all quarters included in the calculation and, for each quarterly period included in the calculation, that quarter’s net realized investment gains (losses), net of tax and discontinued operations.

Return on equity is the ratio of annualized net income less preferred dividends to average shareholders’ equity for the periods presented. Operating return on equity is the ratio of annualized operating income less preferred dividends to adjusted average shareholders’ equity for the periods presented. In the opinion of the company’s management, these are important indicators of how well management creates value for its shareholders through its operating activities and its capital management.

Average annual operating return on equity over a period is the ratio of:

a) the sum of operating income less preferred dividends for the periods presented to

b) the sum of: 1) the sum of the adjusted average shareholders’ equity for all full years in the period presented, and 2) for partial years in the period presented, the number of quarters in that partial year divided by four, multiplied by the adjusted average shareholders’ equity of the partial year.