TRAVELERS COMPANIES, INC. quarterly report, Q3 FY2012

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Business context and reporting period

The Travelers Companies, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2012. The property-and-casualty insurer reports Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. Comparisons are with the three and nine months ended September 30, 2011, unless noted.

Financial performance and position

  • Third-quarter results: Revenue was $6.512 billion, up 1.6%; net income was $864 million, up 159%; diluted EPS was $2.21 versus $0.79. Net premiums earned were $5.666 billion, up 1.1%.
  • Nine-month results: Revenue was $19.263 billion, up 1.0%; net income was $2.169 billion, up 168%; diluted EPS was $5.50 versus $1.88. Net premiums earned were $16.718 billion, up 1.5%.
  • Underwriting: The consolidated GAAP combined ratio improved to 90.3% in Q3 from 104.5%, and to 94.3% for nine months from 108.2%. Q3 loss and loss adjustment expense ratio was 58.4%; underwriting expense ratio was 31.9%.
  • Investments: Q3 net investment income was $722 million, up 5%; nine-month income was $2.200 billion, down 1%. The company attributed fixed-income income pressure to lower reinvestment yields, partly offset by stronger results from real estate partnerships and hedge funds. The fixed-maturity portfolio’s weighted-average credit quality was Aa2.
  • Cash flow: Nine-month operating cash flow was $2.766 billion, versus $1.818 billion; investing cash flow was negative $1.158 billion, versus positive $237 million; financing cash flow was negative $1.606 billion, versus negative $2.022 billion. Cash ended at $220 million.
  • Balance sheet and liquidity: At September 30, total assets were $105.445 billion, investments $74.490 billion, shareholders’ equity $25.905 billion, and debt $6.350 billion. Debt-to-total-capital was 19.7% (21.9% excluding after-tax unrealized investment gains). Holding-company cash and short-term investments were $2.04 billion; $100 million of commercial paper was outstanding under an $800 million program backed by a $1 billion credit facility.
  • Capital returns: The company repurchased 5.4 million shares for $350 million in Q3 and 17.0 million shares for $1.05 billion year to date; $2.56 billion of authorization remained. Nine-month shareholder dividends were $519 million.

Material changes versus the prior comparable periods

  • Profit improvement was driven chiefly by much lower catastrophe losses: $91 million in Q3 2012 versus $606 million; $808 million for nine months versus $2.46 billion. Favorable prior-year reserve development was $193 million in Q3 and $718 million year to date, compared with $184 million and $589 million.
  • Management said underlying underwriting margins also improved, reflecting lower non-catastrophe weather losses and, in certain segments, earned pricing above loss-cost trends. Q3 combined ratio improvement was 14.2 points.
  • Business Insurance operating income rose 85% to $543 million in Q3; Financial, Professional & International operating income fell 15% to $180 million; Personal Insurance returned to $206 million operating income from a $108 million loss.
  • Premium trends varied: Business Insurance earned premiums rose 3% in Q3 and nine months; Financial, Professional & International fell 3% and 4%; Personal Insurance was nearly flat in Q3 and up 1% year to date.
  • Q3 net investment income increased, but nine-month net investment income declined. Q3 net realized investment results were a $2 million loss versus a $2 million gain; nine-month gains were $12 million versus $41 million.
  • Share count declined with repurchases: nine-month weighted-average diluted shares were 391.5 million versus 425.6 million, contributing to EPS growth. The prior-year nine-month comparison also included a $104 million tax benefit from resolution of prior-year tax matters.

Outlook, commentary, risks and unusual items

  • Management expected positive renewal price changes to continue through the remainder of 2012 and into 2013. It anticipated higher underlying underwriting margins across the segments, subject to claims, weather, pricing, and business-volume conditions. No specific earnings or EPS guidance was provided.
  • The company estimated that lower fixed-maturity reinvestment yields could reduce after-tax investment income by about $25 million per quarter versus the corresponding prior-year quarter during the remainder of 2012 and into 2013. It warned that weaker economic or investment markets could further reduce income or cause realized losses or impairments.
  • Management cautioned that efforts to improve rates, terms, and expenses may reduce retention or new business. It expected competitive market conditions, economic uncertainty, and possible weak exposures to pressure premium growth. The Personal Insurance direct-to-consumer initiative was expected to remain unprofitable for a number of years.
  • Asbestos and environmental reserves remain uncertain and could require material future charges. Net asbestos reserves were $2.447 billion; the annual review added $175 million in Q3. Net environmental reserves were $373 million; reserves increased $90 million in Q2. Management stated that additional liabilities could exceed current reserves but could not then be reasonably estimated.
  • Pending appeals concern asbestos direct-action settlements that the company says it is not currently obligated to fund, and a separate reinsurance judgment. The latter totaled $493 million including interest at September 30, but only the $251 million award was recorded as a recoverable; interest remained an unrecognized gain contingency. A separate class settlement could yield an estimated $90 million allocation if upheld; it also was unrecognized.
  • Other exposures include catastrophe losses, reserve-estimation risk, reinsurance collectability and availability, investment-market and interest-rate risk, competition, and regulatory changes. The company said it did not expect SIFI designation under then-current rules, while noting that future designation remained possible.

Important facts for investors to verify

  1. Whether underwriting improvement persists after separating catastrophe losses and favorable prior-year reserve development from underlying results.
  2. How reserve adequacy develops, particularly for asbestos and environmental claims, and the outcomes of the related litigation and appeals.
  3. Whether premium growth, renewal pricing, retention, and new-business trends meet management’s directional expectations across all three segments.
  4. The effect of low reinvestment yields and market volatility on investment income, portfolio values, and shareholders’ equity.
  5. Future capital returns and liquidity, including share repurchases, dividend decisions, debt maturities, and the availability and collectability of reinsurance.