Travelers Companies, Inc. — 2010 Form 10-K
Business and reporting period. Travelers is a property and casualty insurer operating through Business Insurance, Financial, Professional & International Insurance, and Personal Insurance. This 10-K covers the fiscal year ended December 31, 2010; quarterly figures below identify the fourth quarter where provided. Dollar amounts are in U.S. dollars.
Financial results and condition
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $25.11 billion | $24.68 billion |
| Net income | $3.22 billion | $3.62 billion |
| Diluted earnings per share | $6.62 | $6.33 |
| Operating income, as defined by the company | $3.04 billion | $3.60 billion |
| Net earned premiums | $21.43 billion | $21.42 billion |
| Net investment income | $3.06 billion | $2.78 billion |
| Net realized investment gains | $264 million | $17 million |
| Net cash from operating activities | $3.05 billion | $4.23 billion |
| Total assets | $105.18 billion | $109.56 billion |
| Claims and claim adjustment expense reserves | $51.13 billion | $53.13 billion |
| Total debt | $6.61 billion | $6.53 billion |
| Shareholders’ equity | $25.48 billion | $27.42 billion |
| Holding-company liquidity | $3.61 billion | Not stated here |
The consolidated GAAP combined ratio was 93.2%, versus 89.2% in 2009; below 100% generally indicates an underwriting profit. The company reported $1.11 billion of pretax catastrophe losses and $1.25 billion of pretax favorable prior-year reserve development. The debt-to-total-capital ratio was 20.6% (21.9% excluding after-tax unrealized investment gains). Fixed maturities and short-term securities represented 94% of investments; the fixed-maturity portfolio’s average credit quality was Aa2.
Fourth-quarter comparison
| Metric | Q4 2010 | Q4 2009 |
|---|---|---|
| Total revenue | $6.33 billion | $6.46 billion |
| Net income | $894 million | $1.29 billion |
| Diluted earnings per share | $1.95 | $2.36 |
The filing does not provide a separate fourth-quarter cash-flow figure in the supplied text.
Material changes and segment performance
- Annual revenue rose about 2%, but net income fell about 11%. Higher catastrophe losses, slightly lower favorable reserve development and weaker underwriting margins were principal factors. Increased investment income and realized gains partly offset them.
- Catastrophe losses increased to $1.11 billion from $457 million. Favorable prior-year reserve development declined to $1.25 billion from $1.33 billion.
- Business Insurance operating income declined 11% to $2.30 billion; its combined ratio worsened to 91.3% from 86.1%. Premiums were pressured by reduced insured exposures and weak economic activity.
- Financial, Professional & International operating income declined 3% to $620 million; its combined ratio improved slightly to 87.7% from 88.1%. Net written premiums fell 2%.
- Personal Insurance operating income fell 27% to $440 million; its combined ratio worsened to 98.3% from 94.6%, primarily reflecting catastrophe losses and costs of the direct-to-consumer initiative. Net written premiums increased 6%.
- Net investment income rose 10% to $3.06 billion, aided by improved returns on non-fixed-maturity investments. The $264 million of realized gains included a $205 million gain from the sale of Verisk shares.
Outlook, risks, contingencies and unusual items
- 2011 outlook: Management expected modestly reduced underwriting profitability in Business Insurance and Financial, Professional & International Insurance, and modestly improved underwriting profitability in Personal Insurance. It expected fixed-income investment income to be slightly lower, while non-fixed-maturity income was expected to be generally consistent with 2010. These are forward-looking statements, not guarantees.
- Capital returns: Travelers repurchased approximately 95.7 million shares for $5.00 billion in 2010 and paid $673 million in shareholder dividends. Management expected 2011 repurchases to exceed operating income but be lower in dollars than in 2010. The board added $5 billion of repurchase authorization in January 2011.
- Liquidity and debt: The holding company had $3.61 billion in cash and short-term investments. Its $1 billion revolving credit facility supported an $800 million commercial-paper program, with $100 million of commercial paper outstanding at year-end. Subsidiary dividends are subject to regulatory limits and approvals.
- Reserving and catastrophe risk: Reserves depend on estimates and may change materially. Asbestos and environmental reserves were $2.90 billion net of reinsurance; the company increased asbestos reserves by $140 million and environmental reserves by $35 million in 2010. Management warned that ultimate liabilities remain uncertain and could materially exceed current estimates. Catastrophes, climate-related uncertainty and reinsurance collectability are significant risks.
- Asbestos litigation: A bankruptcy court ordered payment of settlements involving asbestos direct-action litigation, plus prejudgment interest. Travelers’ subsidiary appealed the judgment in January 2011. The filing does not provide a clear final cash amount owed under that order.
- Other legal and recovery items: A court awarded the company $251 million plus $169 million of prejudgment interest in a reinsurance dispute; the judgment was appealed. The $251 million was included in reinsurance recoverables, while the interest was not recognized as income. A proposed PPG asbestos settlement could require payments of up to approximately $620 million over 20 years, or an estimated discounted $454 million as of March 31, 2011, subject to contingencies.
- Brazil investment: Travelers agreed to acquire approximately 43% of Brazilian surety insurer J. Malucelli for R$625 million plus an interest-based amount, approximately $377 million equivalent at year-end. Closing was expected in the first half of 2011 and remained subject to conditions.
- Other unusual items: Travelers recorded a $60 million pretax loss related to terminating a replacement-capital covenant and repurchasing $885 million of junior subordinated debentures. The 2009 comparison included an $89 million tax benefit and an $87 million reduction in estimated Hurricane Ike windpool assessments.
Investor facts to verify
- Whether catastrophe losses and favorable prior-year reserve development normalize, and how underlying combined ratios trend without those effects.
- Development of asbestos and environmental reserves, including the appealed settlement-payment order and the contingent PPG settlement.
- Actual collection, timing and appeal outcomes for the $251 million reinsurance award and related unrecognized interest.
- 2011 operating cash flow, subsidiary dividend capacity, debt leverage, and the scale and funding of share repurchases.
- Investment portfolio exposure to municipal credit, interest-rate changes and less-liquid or non-fixed-maturity assets.
- Progress, final cost and performance of the J. Malucelli transaction and the direct-to-consumer initiative.