The Travelers Companies, Inc. — Q3 2010 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2010, with comparisons to the same 2009 periods. Travelers is a property-and-casualty insurer operating through Business Insurance; Financial, Professional & International Insurance; and Personal Insurance.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $6.482 billion | $6.327 billion | $18.780 billion | $18.224 billion |
| Earned premiums | $5.422 billion | $5.421 billion | $15.992 billion | $16.075 billion |
| Net investment income | $735 million | $763 million | $2.250 billion | $1.963 billion |
| Net realized investment gains (losses) | $226 million | $29 million | $220 million | $(172) million |
| Net income | $1.005 billion | $935 million | $2.322 billion | $2.337 billion |
| Diluted earnings per share | $2.11 | $1.65 | $4.68 | $4.02 |
| GAAP combined ratio | 90.6% | 89.7% | 94.0% | 91.2% |
At September 30, 2010, total assets were $108.154 billion, investments $74.717 billion, total debt $6.252 billion and shareholders’ equity $27.295 billion. The debt-to-total-capital ratio was 18.6%, or 20.5% excluding after-tax net unrealized investment gains. Holding-company cash and short-term invested assets totaled $2.82 billion. The $1.0 billion revolving credit facility had no borrowings; the company reported compliance with its covenants. Cash was $298 million.
For the first nine months, operating cash flow was $2.392 billion, down from $3.204 billion; investing activities provided $1.645 billion versus using $1.445 billion in 2009; financing activities used $3.995 billion versus $1.836 billion. The financing outflow chiefly reflected $3.441 billion of share repurchases, shareholder dividends of $512 million and debt repayments of $275 million.
Material changes versus comparable periods
- Q3 net income rose 7%, while diluted EPS rose 28%, benefiting from fewer shares after repurchases. Nine-month net income declined slightly, but diluted EPS increased 16% for the same share-count reason.
- Q3 premiums were essentially flat; nine-month premiums declined less than 1%. Net written premiums increased 2% in both periods, with growth in Personal Insurance offsetting weakness elsewhere.
- Q3 investment income fell 4%, mainly due to lower fixed-income reinvestment yields and lower average invested fixed maturities. Nine-month investment income rose 15%, as non-fixed-maturity results improved from losses in 2009.
- Investment gains included a $205 million pretax gain from the September sale of substantially all remaining Verisk Analytics shares. The gain helped lift realized results versus 2009.
- Catastrophe losses were $117 million in Q3 versus $158 million; for nine months they rose to $1.03 billion from $441 million. Favorable prior-year reserve development was $222 million in Q3 versus $309 million, and $900 million year to date versus $828 million.
- The consolidated combined ratio worsened 0.9 percentage points in Q3 and 2.8 points year to date. Personal Insurance’s year-to-date ratio rose to 100.5%, mainly reflecting higher catastrophe losses and lower favorable reserve development; its Q3 ratio improved to 93.1%.
Outlook, commentary and risks
- Management expected retention to remain strong, while renewal premium changes in Business Insurance and Financial, Professional & International Insurance were expected to remain broadly consistent with the first nine months of 2010. Personal auto renewal increases were expected to moderate slightly.
- Management anticipated modestly lower underwriting profitability for the remainder of 2010 and into 2011 versus 2009, citing competitive conditions and modestly higher loss costs. The direct-to-consumer initiative was expected to remain unprofitable for several years as it develops.
- Management expected fixed-income investment returns to be slightly lower because of lower reinvestment yields; short-term rates were expected to remain historically low. Adverse economic or market conditions could reduce investment income or cause realized losses or impairments.
- The company expected to repurchase $1.1–$1.6 billion of shares in Q4 2010, subject to earnings, capital needs, catastrophe losses, share price, regulation and market conditions. It had $3.11 billion of authorization remaining at quarter-end.
- Asbestos and environmental reserves remain uncertain and could require material future charges. The Q3 asbestos review increased net asbestos reserves by $140 million; net asbestos reserves were $2.658 billion at September 30. Net environmental reserves were $377 million after a $35 million increase in Q2.
- Asbestos direct-action settlements remain subject to litigation over conditions precedent. The Supreme Court had not ruled on Travelers’ pending petitions; plaintiffs had moved to compel settlement payments. Other risks include catastrophe volatility, reserve adequacy, reinsurance collection and availability, investment-market exposure, competition, and changing insurance regulation, including potential effects of the Dodd-Frank Act.
- A court awarded a subsidiary $251 million in a reinsurance dispute plus $166 million of prejudgment interest. The $251 million was included in reinsurance recoverables; the interest was not recognized because it was treated as a gain contingency. The ruling was subject to appeal.
- The filing reports no material change in market-risk components since December 31, 2009. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- How much reported earnings depended on the Verisk gain, favorable reserve development and other realized investment gains.
- Whether catastrophe claims, especially the elevated nine-month 2010 losses, develop beyond current estimates and how underwriting ratios trend excluding catastrophes and reserve releases.
- Developments in asbestos litigation and the adequacy of asbestos and environmental reserves, including recoveries from reinsurers.
- Whether lower reinvestment yields, mortgage-market disruption or credit deterioration affect investment income, asset values and shareholders’ equity.
- Execution and funding of the stated Q4 share-repurchase outlook, alongside capital, liquidity and debt covenant requirements.
- The outcome and collectability of the reinsurance judgment, including the unrecognized interest award and any appeal.