Business context and reporting period
The Travelers Companies, Inc. is a property and casualty insurer with Business Insurance, Financial, Professional & International Insurance, and Personal Insurance segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods unless noted. Figures are in U.S. dollars.
Key financial metrics
| Metric | Q3 2013 | Nine months 2013 |
|---|---|---|
| Revenue | $6.45 billion, down 0.9% | $19.45 billion, up 1.0% |
| Net income | $864 million, unchanged | $2.69 billion, up 24% |
| Diluted EPS | $2.30, up 4% | $7.05, up 28% |
| Net earned premiums | $5.67 billion, unchanged | $16.79 billion, up less than 1% |
| Net investment income | $657 million, down 9% | $2.01 billion, down 8% |
| GAAP combined ratio | 88.9%, improved 1.4 points | 90.6%, improved 3.7 points |
| Operating cash flow | Quarterly value not clearly provided | $2.89 billion, versus $2.77 billion |
Q3 catastrophe losses were $99 million; net favorable prior-year reserve development was $158 million. For the nine months, those amounts were $538 million and $581 million, respectively. Nine-month net income also included $155 million of net realized investment gains, including $115 million from Treasury futures, and a $91 million legal-settlement gain.
Financial position and material changes
- At September 30, total assets were $102.69 billion, investments $72.53 billion, shareholders’ equity $24.81 billion, and debt $6.35 billion. Debt was approximately level with year-end 2012; debt-to-total capital was 20.4%, or 21.4% excluding after-tax unrealized investment gains.
- Holding-company cash and short-term investments totaled $1.87 billion. Cash was $295 million, versus $330 million at December 31, 2012. The company reported nine-month operating cash flow of $2.89 billion, investing cash outflow of $1.11 billion, and financing cash outflow of $1.81 billion.
- Fixed-maturity fair value declined to $62.10 billion from $65.39 billion at year-end, principally reflecting higher interest rates and reduced unrealized appreciation. Nine-month other comprehensive loss was $1.53 billion, largely due to unrealized investment losses.
- Business Insurance nine-month operating income rose to $1.70 billion from $1.52 billion; Personal Insurance rose to $601 million from $331 million. Financial, Professional & International Insurance declined to $477 million from $511 million. Personal Insurance premiums fell 4% year over year for the nine months, while Business Insurance premiums rose 3%.
- The company repurchased 17.0 million shares for $1.40 billion in the first nine months and paid $549 million in dividends. October 22, 2013, the board added $5.0 billion to repurchase capacity; this authorization is subsequent to the quarter-end.
Outlook, commentary, risks and unusual items
- Management expected renewal pricing in aggregate to exceed loss-cost trends through the rest of 2013 and into 2014, while warning that competition, economic conditions, weather and regulatory approvals could affect premium growth and pricing.
- Management expected lower reinvestment yields to reduce fixed-maturity after-tax investment income by approximately $25 million per quarter in the remainder of 2013 and into 2014 versus corresponding prior-year quarters. Non-fixed-maturity investment income for Q4 2013 was also expected to be below Q4 2012.
- The planned acquisition of The Dominion of Canada General Insurance Company, for approximately C$1.125 billion before adjustments, was expected to close in Q4 2013 subject to regulatory approvals and customary conditions. Management anticipated the acquisition would initially raise the Financial, Professional & International segment’s combined ratio; integration and profitability improvements could take years.
- Travelers launched a Personal Insurance expense-reduction plan targeting $140 million in annualized pretax savings by 2015; $10 million of an estimated $16 million restructuring charge was recorded in Q3. Quantum Auto 2.0 was launching in selected states, with broader rollout expected by the end of 2014.
- Asbestos and environmental exposures remain significant uncertainties. Net asbestos reserves were $2.42 billion and net environmental reserves $359 million at September 30. Management said additional liabilities could exceed reserves and could materially affect future results, but could not reasonably estimate the amount.
- A $487 million reinsurance claim, including $236 million of accrued interest, remained subject to further proceedings; the interest was not recognized as income. A New York workers’ compensation legislative change contributed a $42 million reserve charge in the first nine months.
- Interest-rate movements may materially affect investment income, portfolio fair values and equity. Other stated risks include catastrophe losses, reserve-estimation uncertainty, reinsurance collectability, litigation, competition, regulation and acquisition execution. Management reported compliance with credit-agreement covenants and effective disclosure controls.
Important facts for investors to verify
- Whether underlying underwriting improvements persist after accounting for catastrophe losses and favorable prior-year reserve development.
- Whether falling investment income and investment-market movements offset underwriting gains.
- Development of asbestos, environmental and other claims reserves, including the outcomes of material litigation and reinsurance disputes.
- Closing terms, financing and initial results of the Dominion acquisition, including its effect on segment combined ratios.
- Actual timing and scale of future repurchases and the effect on capital, given the substantial new authorization and stated capital, catastrophe and regulatory constraints.