The Travelers Companies, Inc. — Q2 2013 Form 10-Q
Business context and period. Travelers is a property and casualty insurer operating through Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. This unaudited filing covers the quarter and six months ended June 30, 2013, with comparisons to 2012.
Financial performance
Amounts are in millions except per-share data, ratios, and where otherwise noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenues | $6,674 | $6,359 | $13,002 | $12,751 |
| Earned premiums | $5,603 | $5,529 | $11,120 | $11,052 |
| Net investment income | $687 | $738 | $1,357 | $1,478 |
| Net realized investment gains | $167 | $4 | $177 | $14 |
| Income before taxes | $1,177 | $608 | $2,397 | $1,685 |
| Net income | $925 | $499 | $1,821 | $1,305 |
| Diluted EPS | $2.41 | $1.26 | $4.75 | $3.29 |
| GAAP combined ratio | 94.3% | 100.5% | 91.4% | 96.3% |
- Underwriting and earnings: Q2 net income rose 85% and diluted EPS rose 91% year over year, with share repurchases also lifting per-share results. Management attributed the improvement chiefly to lower catastrophe losses, better underlying underwriting margins, higher realized gains, and a $91 million legal-settlement gain. A $63 million benefit from resolution of prior-year tax matters also reduced tax expense.
- Loss experience: Catastrophe losses were $340 million in Q2 versus $549 million a year earlier, and $439 million for the first half versus $717 million. Net favorable prior-year reserve development was $192 million in Q2 versus $221 million, and $423 million for the first half versus $525 million. The underlying loss and loss-adjustment expense ratio improved 2.4 points in Q2 and 3.2 points year to date.
- Investment income: Q2 pretax net investment income fell 7%; first-half income fell 8%. The average pretax yield was 3.9% versus 4.2% in both comparison periods, primarily reflecting lower reinvestment yields and weaker private-equity partnership results. Q2 realized gains included $134 million from Treasury futures; no futures contracts remained open at June 30.
- Segments: Q2 operating income was $579 million for Business Insurance (up 60%), $154 million for Financial, Professional & International (down 15%), and $142 million for Personal Insurance (up from $17 million). Business Insurance benefited from lower catastrophe losses and the legal settlement; Financial, Professional & International was affected by higher catastrophe losses and lower reserve releases; Personal Insurance benefited from lower catastrophe and non-catastrophe weather losses.
- Cash flow: First-half operating cash flow was $1.252 billion versus $1.265 billion. Investing activities provided $92 million versus using $81 million; financing activities used $1.357 billion versus $1.169 billion. Consolidated cash ended the period at $308 million.
- Balance sheet and capital: At June 30, total assets were $101.90 billion, investments $71.27 billion, claims reserves $49.62 billion, debt $5.852 billion, and shareholders’ equity $24.89 billion. Debt declined from $6.350 billion at year-end 2012. Debt-to-total-capital was 19.0%, or 20.1% excluding after-tax unrealized investment gains. Book value per common share was $66.65. Holding-company cash and short-term investments totaled $2.05 billion, with a 54-day weighted average maturity.
- Other comprehensive income: First-half OCI was a loss of $1.516 billion, principally reflecting lower unrealized gains on investments and foreign-currency translation; equity securities and fixed-maturity fair values declined amid rising interest rates. Accumulated OCI fell to $720 million from $2.236 billion at year-end.
Material changes, outlook and risks
- Premium growth was modest overall: Q2 earned premiums increased 1%, while first-half premiums rose less than 1%. Business Insurance grew; Financial, Professional & International and Personal Insurance earned premiums declined. Personal Insurance net written premiums were down year over year.
- Management expected renewal pricing increases to generally exceed loss-cost trends through the rest of 2013 and into 2014, while noting competitive new-business markets and economic uncertainty. It expected underlying margins in Business Insurance to improve; Financial, Professional & International margins to remain broadly consistent with first-half levels; and Personal Insurance margins to be broadly consistent overall. Homeowners margins could soften as weather losses normalize.
- Management estimated lower fixed-maturity reinvestment yields could reduce after-tax investment income by about $25 million per quarter during the remainder of 2013 and into 2014 versus the corresponding prior-year quarters. Non-fixed-maturity investment income was expected to be below the second half of 2012.
- The company planned expense reductions, particularly in Agency Automobile, targeting $140 million of annualized pretax savings by 2015; an approximately $16 million restructuring charge was expected, including $10 million in Q3 2013. Management cautioned these actions could reduce retention or new-business volumes and might not achieve their aims.
- Travelers agreed to acquire The Dominion of Canada General Insurance Company for C$1.125 billion, approximately US$1.1 billion, subject to adjustments, regulatory approvals, and other closing conditions. Closing was expected in Q4 2013; funding was expected from a combination of debt and/or preferred stock and internal resources.
- Reserves and litigation: Management said asbestos and environmental reserves were appropriately established but emphasized significant uncertainty and the possibility of additional liabilities or material future charges. Net asbestos reserves were $2.278 billion; net environmental reserves were $388 million. An appeal concerning asbestos direct-action settlements remained pending. A separate USF&G reinsurance judgment claim totaled $482 million, including $231 million of interest not recognized as income because it remained a gain contingency.
- Capital returns and financing: Travelers repurchased 3.6 million shares for $300 million in Q2 and 7.3 million for $600 million in the first half; $1.56 billion remained under authorization at June 30. It paid $366 million in first-half dividends and announced a $0.50-per-share dividend payable September 30, 2013. A new five-year $1.0 billion revolving credit agreement replaced the prior facility; the company reported compliance with its covenants.
- Key risks include catastrophe volatility, reserve-estimation uncertainty, asbestos and environmental litigation, reinsurance collectability and availability, interest-rate and investment-market movements, competitive pricing, economic conditions, regulatory approvals and execution of the Dominion acquisition. The filing provides no formal earnings-per-share guidance.
Important facts for investors to verify
- How much of the earnings improvement is repeatable after accounting for lower catastrophe losses, favorable reserve development, the $91 million settlement gain, $63 million tax benefit, and Treasury-futures gains?
- Whether pricing and expense actions sustain underlying underwriting improvement without materially weakening retention or policy growth, particularly in Personal Insurance.
- Whether asbestos and environmental reserves, reinsurance recoverables, and the disputed USF&G interest claim develop as expected; the filing says potential additional liabilities cannot currently be reasonably estimated.
- Whether declining investment yields, market-value changes, and lower non-fixed-maturity returns affect future income, equity, or capital ratios.
- Whether the Dominion acquisition closes on expected terms and timing, and how its financing affects debt, liquidity, and capital returns.