Business Context and Reporting Period
Company: The Travelers Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company provides property and casualty insurance products and services to businesses, government units, associations, and individuals, primarily in the United States and selected international markets. Operations are organized into three segments: Business Insurance, Financial, Professional & International Insurance, and Personal Insurance.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $6,162 | $11,897 |
| Premiums | $5,353 | $10,654 |
| Net Investment Income | $658 | $1,200 |
| Net Income | $740 | $1,402 |
| Diluted EPS | $1.27 | $2.38 |
| GAAP Combined Ratio | 93.2% | 91.9% |
| Total Assets | $111,326 | $111,326 |
| Total Investments | $73,443 | $73,443 |
| Total Debt | $6,532 | $6,532 |
| Shareholders' Equity | $26,920 | $26,920 |
| Net Cash Provided by Operating Activities | N/A | $1,789 |
Material Changes vs. Prior Comparable Period
- Net Income Decline: Net income for the three months ended June 30, 2009, decreased 21% to $740 million from $942 million in the same period of 2008. For the six months, net income decreased 27% to $1.40 billion from $1.91 billion.
- Revenue Drivers: The decline in net income was driven by reduced net favorable prior year reserve development ($261 million in Q2 2009 vs. $526 million in Q2 2008), lower net investment income due to negative returns from non-fixed maturity investments and lower interest rates, and reduced underwriting margins.
- Investment Losses: Net realized investment losses for the six months ended June 30, 2009, were $201 million, compared to losses of $26 million in the same period of 2008. This included $214 million in other-than-temporary impairment losses.
- Catastrophe Losses: Catastrophe losses decreased to $200 million in Q2 2009 from $356 million in Q2 2008, partially offsetting other negative factors.
- Combined Ratio: The GAAP combined ratio increased to 93.2% in Q2 2009 from 89.3% in Q2 2008, reflecting higher loss ratios due to reduced favorable reserve development and increased non-catastrophe weather-related losses.
Guidance, Outlook, and Risks
- Outlook: Management expects property and casualty insurance market conditions to remain very competitive through the remainder of 2009 and into 2010. Renewal premium changes are expected to be flat or modestly higher in Business and Financial segments, while Personal Insurance renewal premiums are expected to increase slightly.
- Investment Environment: The investment environment is expected to remain challenging, particularly for non-fixed maturity investments (private equity, hedge funds, real estate), which produced negative income in the first half of 2009.
- Loss Cost Trends: Severity is expected to increase modestly for non-catastrophe claims. Higher property loss cost trends are expected to continue in the second half of 2009.
- Legal Proceedings:
- Asbestos Litigation: On June 18, 2009, the U.S. Supreme Court ruled in favor of the Company regarding direct action asbestos litigation, reversing a Second Circuit decision. However, the case was remanded for further proceedings on procedural issues, meaning settlements are not yet final.
- Environmental Reserves: The Company increased net environmental reserves by $70 million in Q2 2009 due to upward development in expected defense and settlement costs.
- SEC Inquiry: The Company is cooperating with an SEC inquiry regarding second-quarter 2004 accounting adjustments related to the merger of St. Paul Companies and Travelers Property Casualty Corp.
- Capital Actions: The Company repurchased 18.5 million shares for approximately $750 million in the first six months of 2009. $3.06 billion of capacity remains under the share repurchase authorization.
Important Facts for Investor Verification
- Investment Portfolio Quality: Verify the weighted average credit quality of the fixed maturity portfolio (rated "Aa2" at June 30, 2009) and the extent of unrealized losses, particularly in mortgage-backed securities and sub-prime assets.
- Reserve Adequacy: Monitor the development of asbestos and environmental reserves, which totaled $2.79 billion and $428 million (net) respectively, and the uncertainty surrounding future litigation outcomes.
- Non-Fixed Maturity Returns: Assess the continued performance of private equity, hedge funds, and real estate partnerships, which contributed to negative investment income in 2009.
- Underwriting Margins: Track the impact of competitive pricing and loss cost trends on the combined ratio, especially in the Personal Insurance segment where non-catastrophe weather-related losses increased.
- Legal Resolution: Follow the status of the remanded asbestos litigation case in the Second Circuit and the outcome of the SEC inquiry regarding 2004 accounting adjustments.