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 nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenues | $6.327B | $6.145B | $18.224B | $18.672B |
| Net income | $935M | $214M | $2.337B | $2.123B |
| Diluted EPS | $1.65 | $0.36 | $4.02 | $3.47 |
| Net investment income | $763M | $716M | $1.963B | $2.309B |
| Net realized investment gains (losses) | $29M | ($170M) | ($172M) | ($196M) |
| GAAP combined ratio | 89.7% | 104.7% | 91.2% | 94.0% |
- Underwriting and earnings: Q3 improvement chiefly reflected catastrophe losses of $158M pretax versus $1.04B in Q3 2008. Nine-month catastrophe losses were $441M versus $1.49B. Net favorable prior-year reserve development was $309M in Q3 (versus $334M) and $828M year to date (versus $1.26B).
- Premiums: Earned premiums were $5.421B in Q3 and $16.075B year to date, down less than 1% in each comparison. Nine-month gross written premiums declined 2% to $17.767B and net written premiums declined 1% to $16.148B. Management cited weaker economic activity, exposure reductions and policy cancellations, partly offset by retention and renewal pricing.
- Segment results: Q3 operating income was $668M for Business Insurance, $167M for Financial, Professional & International, and $149M for Personal Insurance. Nine-month operating income was $1.775B, $448M and $391M, respectively. Personal Insurance moved from a Q3 operating loss of $64M in 2008 to income of $149M.
- Cash flow: Nine-month operating cash flow was $3.204B, up from $2.573B. Investing activities used $1.445B, versus approximately breakeven in 2008; financing activities used $1.836B. Cash ended the period at $286M, down from $350M at year-end 2008.
- Balance sheet and liquidity: Total assets were $112.617B and shareholders’ equity $28.160B at September 30. Investments totaled $76.123B, including $65.350B of available-for-sale fixed maturities. Holding-company liquidity was $2.56B. Debt was $6.528B, up from $6.181B at year-end; debt-to-total capital was 18.8%, or 20.1% excluding after-tax unrealized investment gains and losses. The company reported a $3.14B pretax unrealized gain on fixed maturities, versus a $294M pretax unrealized loss at year-end.
- Shareholder capital actions: The company repurchased 39.3M shares for $1.75B during the first nine months and paid $518M in dividends. In October, the board authorized up to an additional $6B of repurchases and the company announced a 10% increase in its quarterly dividend to $0.33 per share.
Material changes, outlook and risks
- Drivers and offsets: Lower catastrophe losses drove much of the year-over-year earnings improvement. Q3 investment income rose 7%, but nine-month investment income fell 15%, reflecting lower short-term rates and weaker returns from non-fixed-maturity investments. Nine-month results also included an $88M after-tax benefit from favorable resolution of prior-year tax matters.
- Outlook: No quantified earnings or combined-ratio guidance is provided. Management expected a highly competitive market, weaker exposures and modestly higher loss costs to result in somewhat reduced underwriting profitability in Q4 2009 and early 2010. It expected Business and Financial/Professional/International renewal pricing to be flat or modestly higher; personal-auto renewal pricing to decline slightly; and homeowners renewal pricing to remain consistent. The direct-to-consumer initiative was expected to increase expenses and reduce Personal Insurance underwriting profitability for several years.
- Claims and reserve uncertainty: Management warned that asbestos and environmental exposures remain difficult to estimate and could produce material future charges beyond reserves. Q3 asbestos reviews increased reserves by $185M; net asbestos reserves were about $2.915B at September 30. Net environmental reserves were $414M, following a $70M increase in Q2. Catastrophe frequency/severity, weather losses, claims inflation, reserve development and reinsurance collectability are material uncertainties.
- Investment and market risks: Management described the investment environment as challenging, particularly for non-fixed-maturity assets. Below-investment-grade holdings were 2.8% of fixed maturities, versus 2.0% at year-end. Market value, credit, liquidity and interest-rate changes may affect investment income, equity and statutory surplus. The filing also notes economic, competitive, regulatory, rating, technology and agent/broker risks.
- Unusual items and subsequent events: Adoption of revised impairment accounting in April 2009 increased Q3 net income by approximately $29M after tax ($0.05 per share), with a small offsetting reduction in investment income. In October, Travelers sold half its Verisk Analytics shares for $184M and expected a Q4 pretax realized gain of about $159M ($103M after tax); the remaining shares are subject to transfer restrictions. The company issued $500M of 5.90% senior notes due 2019 and repaid $141M of matured convertible notes.
- Legal matters: The U.S. Supreme Court ruled favorably for Travelers on key asbestos direct-action issues, but remanded remaining procedural and notice issues; related settlements were not yet final. Other disclosed matters include reinsurance litigation, broker antitrust appeals, government inquiries and an SEC inquiry into 2004 merger-related accounting. Outcomes of asbestos/environmental matters remain uncertain.
- Controls and ratings: Management concluded disclosure controls were effective at September 30, 2009 and reported no material quarterly change in internal control over financial reporting. S&P revised its outlook to positive in August and affirmed ratings.
Important facts for investors to verify
- How much of earnings and the combined-ratio improvement reflects lower catastrophe losses and favorable reserve development, and whether those benefits persist.
- Underlying underwriting trends after excluding catastrophe losses, prior-year reserve development, windpool assessment changes and other one-off items.
- Investment portfolio credit quality, impairment assumptions, unrealized gains, and the performance and liquidity of non-fixed-maturity investments.
- Adequacy and development of asbestos and environmental reserves, including the status and potential effect of related litigation and reinsurance recoveries.
- Capital deployment, including the new repurchase authorization and dividend increase, relative to catastrophe exposure, subsidiary capital needs and liquidity.
- Whether economic conditions, pricing, exposures and loss-cost trends produce the reduced underwriting profitability management anticipated for late 2009 and early 2010.