The Travelers Companies, Inc. — Q1 2013 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2013, with comparisons to Q1 2012; balance-sheet comparisons are to December 31, 2012. Travelers is a property and casualty insurer operating through Business Insurance, Financial, Professional & International Insurance, and Personal Insurance.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenues | $6.328 billion | $6.392 billion |
| Net income | $896 million | $806 million |
| Diluted EPS | $2.33 | $2.02 |
| Net earned premiums | $5.517 billion | $5.523 billion |
| Net investment income | $670 million | $740 million |
| Operating cash flow | $530 million | $814 million |
| GAAP combined ratio | 88.5% | 92.2% |
| Total assets | $103.897 billion | $104.938 billion at Dec. 31, 2012 |
| Total debt | $5.851 billion | $6.350 billion at Dec. 31, 2012 |
| Shareholders’ equity | $25.596 billion | $25.405 billion at Dec. 31, 2012 |
Net income rose 11% and diluted EPS rose 15%, with the larger per-share increase reflecting share repurchases. The combined ratio improved 3.7 percentage points. The loss and loss-adjustment expense ratio was 56.2%; the underwriting expense ratio was 32.3%. The filing does not provide a consolidated profit-margin measure.
Operating cash flow fell by $284 million, which management attributed primarily to higher paid operating expenses and lower receipts from reinsurance recoverables. Cash was $243 million at quarter-end. Separately, the holding company had $1.55 billion of cash and short-term invested assets, with a 67-day weighted-average maturity; this exceeded its stated approximate $1.1 billion minimum target.
Debt declined after repayment at maturity of $500 million of 5.00% senior notes. The debt-to-total-capital ratio was 18.6%, or 20.5% excluding after-tax unrealized investment gains, within the stated 15%–25% target range for the latter measure. Book value per common share was $68.00. Total investments were $73.081 billion, including $64.699 billion of fixed maturities; the fixed-maturity portfolio’s weighted-average credit quality was Aa2.
Material changes and segment performance
- Underwriting and claims: Claims and claim adjustment expenses declined 6% to $3.153 billion. Catastrophe losses were $99 million versus $168 million a year earlier. Net favorable prior-year reserve development was $231 million versus $304 million; Q1 2013 development included a $42 million charge related to New York workers’ compensation legislation.
- Investments: Net investment income fell 9%. The average pretax portfolio yield declined to 3.8% from 4.3%, primarily due to lower reinvestment yields and weaker returns from real estate and private-equity partnerships.
- Business Insurance: Operating income was $590 million versus $612 million. Earned premiums increased 2%; the combined ratio improved to 89.4% from 89.6%. Lower reserve development and investment income offset improved underlying margins and lower catastrophe losses.
- Financial, Professional & International: Operating income increased to $163 million from $149 million. Earned premiums were nearly flat; the combined ratio improved to 82.3% from 87.8%, reflecting improved underlying results and higher favorable reserve development.
- Personal Insurance: Operating income rose to $197 million from $108 million despite earned premiums declining 4%. The combined ratio improved to 89.4% from 97.8%, with lower catastrophe and other weather-related losses and higher favorable reserve development.
Gross written premiums increased 2% to $6.188 billion and net written premiums increased 2% to $5.597 billion. Growth in Business Insurance and Financial, Professional & International was offset in earned premiums by a 4% decline in Personal Insurance.
Other comprehensive income was a loss of $310 million, compared with income of $34 million in Q1 2012, primarily reflecting a larger decline in unrealized gains on investment securities and foreign-currency translation. Financing cash flows included $500 million of debt repayment, $175 million of dividends, and $300 million of share repurchases; 3.7 million shares were repurchased under the authorization.
Outlook, risks, contingencies, and unusual items
- Management outlook: Travelers expected renewal pricing increases generally to exceed loss-cost trends during the remainder of 2013, with strong retention overall. It projected underlying underwriting margins above 2012 in Business Insurance and modestly higher in Financial, Professional & International; Personal Insurance margins were expected to be broadly consistent with 2012. Personal lines renewal premium changes were expected to moderate from Q1 but remain positive, subject to weather, loss trends, regulation, and competition.
- Investment outlook: Management estimated that lower fixed-income reinvestment yields could reduce after-tax fixed-maturity investment income by about $30 million per quarter in the remainder of 2013 versus corresponding 2012 quarters. It also expected 2013 non-fixed-maturity investment income to be below 2012. The company planned to maintain a high-quality, relatively short-duration portfolio and increase its short position in Treasury futures, subject to market conditions.
- Capital returns and liquidity: The company expected dividends and repurchases generally, over time, not to exceed operating income. On April 23, 2013, it announced a 9% increase in its quarterly dividend, from $0.46 to $0.50 per share. Its $1.0 billion credit facility was due to expire in June 2013 and was being replaced; it supported an $800 million commercial-paper program, of which $100 million was outstanding.
- Reserve and litigation exposure: Asbestos and environmental claims involve uncertain coverage, litigation, and payment patterns. Net asbestos reserves were $2.334 billion and net environmental reserves were $336 million at March 31. Management warned that additional liabilities or reserve increases could be material, although they could not then be reasonably estimated. The filing also describes direct-action asbestos settlement disputes and an appeal awaiting decision.
- Unrecognized potential recoveries: A USF&G reinsurance claim totaled $476 million, including $251 million of recoverables recorded in the balance sheet and $225 million of interest treated as an unrecognized gain contingency. Travelers anticipated an allocation of approximately $90 million from a separate workers’ compensation reinsurance class settlement; it said recognition would occur when payment was assured.
- Other risks and items: Unfunded private-equity and real-estate partnership commitments were $1.32 billion. Quantifiable indemnification obligations related to sales of businesses had a maximum stated amount of $471 million, of which $8 million was recognized. Major risks include catastrophe losses, reserve-estimation uncertainty, reinsurance collectability, market and interest-rate movements, competition, and economic conditions. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether favorable reserve development and the low catastrophe-loss experience persist, and the effect of the $42 million New York workers’ compensation charge.
- Personal Insurance premium and policy trends, including the expected moderation in renewal pricing and the ongoing profitability of the direct-to-consumer business.
- Investment-income sensitivity to low reinvestment yields, partnership performance, interest rates, and portfolio valuation changes.
- Development of asbestos and environmental claims, the asbestos settlement appeal, and the timing and recognition of the two potential reinsurance-related recoveries.
- Replacement of the credit facility due in June 2013, holding-company liquidity, and future dividends and share repurchases relative to operating income and capital needs.