Travelers Companies, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Travelers provides property and casualty insurance through Business Insurance, Financial, Professional and International Insurance, and Personal Insurance.
Key financial results
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenues | $6,119 | $5,735 |
| Net income | $647 | $662 |
| Diluted earnings per share | $1.25 | $1.11 |
| Net earned premiums | $5,230 | $5,301 |
| Net investment income | $753 | $542 |
| Net realized investment gains (losses) | $25 | $(214) |
| GAAP combined ratio | 96.4% | 90.6% |
| Operating cash flow | $531 | $813 |
- Revenue rose about 7%, while net income declined about 2%. Diluted EPS increased about 13%, primarily reflecting a 13% reduction in weighted-average diluted shares after repurchases.
- Q1 2010 claims included $471 million of catastrophe losses and $294 million of favorable prior-year reserve development; Q1 2009 included $83 million and $258 million, respectively. The loss ratio was 64.0% versus 59.7%; the underwriting expense ratio was 32.4% versus 30.9%.
- Net investment income rose 39%; average pretax portfolio yield was 4.1% versus 3.0%. Management attributed the improvement mainly to stronger non-fixed-maturity investment returns, which had been negative in Q1 2009. Lower reinvestment and short-term interest rates weighed on fixed-maturity income.
- Balance sheet at March 31: total assets $108.70 billion; investments $74.04 billion; shareholders’ equity $26.67 billion; debt $6.53 billion. Debt-to-total-capital was 19.7%, or 20.9% excluding after-tax unrealized investment gains.
- Cash was $251 million. Holding-company liquidity, including cash, short-term investments and other readily marketable securities, was $3.03 billion. Operating cash flow declined year over year; investing activities provided $952 million, while financing activities used $1.49 billion, primarily for repurchases and dividends.
Material changes and segment performance
- Earned premiums declined 1%. Business Insurance premiums fell 5%, largely due to reduced insured exposures amid weak economic activity. Financial, Professional and International premiums rose 3%, primarily from foreign exchange. Personal Insurance premiums rose 2%, supported by retention, renewal pricing and new business.
- Business Insurance operating income increased to $567 million from $547 million; its combined ratio worsened to 91.4% from 89.0%. Higher investment income and favorable reserve development were partly offset by catastrophe losses and weaker premium volume.
- Financial, Professional and International operating income fell to $86 million from $148 million; its combined ratio rose to 98.9% from 90.2%. The segment incurred $86 million of catastrophe losses, principally from the Chile earthquake.
- Personal Insurance operating income fell to $59 million from $154 million; its combined ratio rose to 102.6% from 93.3%. Catastrophe losses increased to $250 million from $71 million, and favorable reserve development declined.
- Net realized investment results improved to a $25 million gain from a $214 million loss, with impairment losses in income of $10 million versus $184 million. Q1 2009 net income also benefited from a $69 million favorable resolution of prior-year tax matters and a $61 million reduction in estimated Hurricane Ike windpool assessments. Q1 2010 included $12 million of tax expense related to federal health care legislation.
Outlook, risks and contingencies
- No specific earnings-per-share or net-income guidance was provided. Management expected high retention to continue and renewal pricing in Business Insurance and Financial, Professional and International to remain similar to 2009, with positive rate changes largely offset by declining exposures. Management expected modestly lower underwriting profitability in the remainder of 2010 versus 2009, reflecting competition, economic conditions and modestly higher loss costs.
- Management expected fixed-maturity returns to be generally consistent with recent periods, short-term rates to remain historically low, and non-fixed-maturity investment income to improve from 2009; it warned that deteriorating markets could reduce income or cause realized losses and impairments.
- Management expected to continue repurchases and indicated plans to repurchase $2.1–$2.6 billion of shares during the remainder of 2010, subject to earnings, capital needs, market conditions and other factors. Q1 repurchases totaled approximately $1.40 billion; $5.11 billion of authorization remained. On April 23, 2010, Travelers announced a 9% increase in its quarterly dividend to $0.36 per share.
- Catastrophe losses, reserve revisions, weak economic conditions, investment-market volatility, reinsurer collectability and competitive pressure are key risks. Asbestos and environmental reserves are uncertain; management said additional liabilities could exceed reserves and future charges could be material, but could not reasonably estimate the amount.
- Net asbestos reserves were $2.684 billion at March 31, 2010; net environmental reserves were $377 million. In asbestos direct-action litigation, the Second Circuit’s March 22, 2010 ruling found notice insufficient to bar one objector’s contribution claims; TPC sought rehearing. The filing also describes pending broker antitrust appeals and an SEC inquiry concerning 2004 purchase-accounting adjustments and the 2004 merger.
- Management said liquidity needs were expected to be met from operations, asset maturities and investment income. A $1.0 billion credit facility was due to expire in Q2 2010; Travelers expected to replace it. The filing reported no material changes in market-risk components since year-end 2009, and no material changes in risk factors from the 2009 Form 10-K.
Important facts for investors to verify
- How much of earnings and underwriting results depends on favorable prior-year reserve development, and whether that development continues.
- Catastrophe exposure and the effect of future catastrophe losses on claims, liquidity, reinsurance recoveries and capital.
- The durability and composition of investment income, particularly non-fixed-maturity returns, and exposure to low interest rates, unrealized losses and impairments.
- Whether economic conditions, insured exposures, renewal pricing and competition affect premium growth and underwriting profitability as management expected.
- Reserve adequacy and potential outcomes of asbestos, environmental and other litigation, including the related uncertainty and possible material future charges.
- The effect of continued share repurchases and dividends on capital, liquidity and per-share results, as well as replacement of the expiring credit facility.