Business context and reporting period
The Travelers Companies, Inc. is a property-and-casualty insurer operating through Business Insurance, Financial, Professional & International Insurance, and Personal Insurance. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2010 | Six months 2010 | Comparable-period change |
|---|---|---|---|
| Total revenue | $6.18 billion | $12.30 billion | +0.3%; +3.4% |
| Earned premiums | $5.34 billion | $10.57 billion | −0.2%; −0.8% |
| Net investment income | $762 million | $1.52 billion | +16%; +26% |
| Net income | $670 million | $1.32 billion | −9%; −6% |
| Diluted EPS | $1.35 | $2.60 | +6%; +9% |
| GAAP combined ratio | 95.2% | 95.8% | Up 2.0 and 3.9 points |
The combined ratio was below 100% overall, while Personal Insurance reported 105.9% for Q2 and 104.3% year to date. Catastrophe losses were $439 million pretax in Q2 and $910 million for six months; favorable prior-year reserve development was $384 million and $678 million, respectively. Investment income growth partly offset higher catastrophe losses. Fewer weighted-average shares following repurchases lifted EPS despite lower net income.
By segment, Q2 operating income was $567 million for Business Insurance, $172 million for Financial, Professional & International Insurance, and $19 million for Personal Insurance. For the first six months, the respective figures were $1.13 billion, $258 million, and $78 million. Personal Insurance’s Q2 result was down 78% year over year, primarily reflecting higher catastrophe losses and less favorable reserve development.
Six-month operating cash flow was $1.05 billion, versus $1.79 billion in 2009. Investing activities provided $2.20 billion, compared with $1.12 billion used in 2009; financing activities used $3.23 billion, primarily for share repurchases, dividends, and debt repayment. At June 30, total assets were $107.02 billion, shareholders’ equity $26.29 billion, and debt $6.28 billion. The debt-to-total-capital ratio was 19.3% (20.8% excluding net unrealized investment gains). Holding-company cash and short-term investments were $2.40 billion. The filing does not provide a conventional current ratio; insurer liquidity is discussed through cash flows, investments, and funding resources.
Material changes and notable items
- Net investment income rose substantially, including a recovery in income from non-fixed-maturity investments; fixed-maturity income faced lower reinvestment and short-term rates.
- Catastrophe losses increased sharply from 2009, including severe winter storms, wind and hail, flooding, and a Chile earthquake. Favorable reserve development also increased, but remained subject to future claims experience.
- Earned premiums were nearly flat overall. Business Insurance premiums declined amid lower economic activity and insured exposures; Personal Insurance grew, while the international segment benefited in part from lower reinsurance costs and currency effects.
- The company repurchased 55.0 million shares for approximately $2.80 billion in the first half. The average repurchase price was $50.96, and $3.71 billion remained authorized at June 30.
- A $250 million, 8.125% senior-note maturity was paid in April from internally generated funds. In June, Travelers replaced its expiring facility with a three-year $1.0 billion revolving credit agreement; it reported covenant compliance. The facility also backs an $800 million commercial-paper program, with $100 million outstanding.
- Net environmental reserves increased by $35 million in Q2; net asbestos reserves were $2.59 billion at June 30. Management cautions that asbestos and environmental outcomes may require material additional charges, which cannot currently be reasonably estimated.
Outlook, risks, and contingencies
Management expected retention to remain strong, but anticipated competitive markets, weak or uncertain economic conditions, and modestly higher loss costs to produce modestly lower underwriting profitability in the remainder of 2010 and into 2011 compared with 2009. It expected fixed-income investment returns generally to track recent periods, while short-term and non-fixed-maturity returns would remain challenged. A direct-to-consumer Personal Insurance initiative was expected to generate modest premium growth but remain unprofitable for several years.
Travelers expected to repurchase approximately $1.2 billion of shares during the remainder of 2010, subject to earnings, capital and regulatory needs, catastrophe losses, market conditions, and other factors. It warned that significant catastrophe losses, adverse reserve development, deteriorating investment or economic conditions, reinsurance collection or availability issues, competition, and asbestos/environmental litigation could materially affect results or liquidity. Future reserve development could be favorable or unfavorable. The filing also describes pending asbestos direct-action litigation and broker antitrust appeals; outcomes remain uncertain. Quantifiable guarantees for certain investments and related loans totaled $84 million, with approximately $40 million expected to be recoverable from a third party; quantifiable sale-related indemnification obligations totaled $1.34 billion, of which $11 million was recorded.
Important facts for investors to verify
- Whether catastrophe losses and favorable prior-year reserve development persist, and how underlying loss trends affect each segment’s combined ratio.
- Whether premium volume, renewal pricing, and exposures recover as economic conditions evolve, particularly in Business Insurance.
- Investment income sustainability and portfolio exposure to interest rates, credit deterioration, municipal issuers, and less-liquid investments.
- Development of asbestos and environmental claims, reserve adequacy, and related litigation or reinsurance recoveries.
- Planned share repurchases and dividends relative to capital needs, catastrophe exposure, and credit-facility covenant headroom.