The Travelers Companies, Inc. — Q1 2012 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2012, compared with the same period in 2011. Travelers is a property-and-casualty insurer operating through Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change / note |
|---|---|---|---|
| Total revenues | $6,392 | $6,278 | Up 2% |
| Earned premiums | $5,523 | $5,371 | Up 3% |
| Net investment income | $740 | $779 | Down 5% |
| Income before tax | $1,077 | $969 | Up 11% |
| Net income | $806 | $839 | Down 4% |
| Diluted EPS | $2.02 | $1.92 | Up 5%; aided by fewer shares outstanding |
| Operating cash flow | $814 | $633 | Up $181 |
| GAAP combined ratio | 92.2% | 94.7% | Improved 2.5 points |
Financial position and liquidity
- At March 31, total assets were $104.87 billion, investments $73.24 billion, total liabilities $79.99 billion, and shareholders’ equity $24.87 billion.
- Total debt was $6.61 billion, broadly unchanged from year-end 2011. Debt-to-total capital was 21.0%, or 23.1% excluding after-tax net unrealized investment gains.
- Holding-company cash and short-term invested assets totaled $2.22 billion, with a weighted average maturity of 69 days. The company reported this as more than twice its minimum target liquidity level.
- Cash was $258 million at quarter-end. Investing activities used $295 million and financing activities used $478 million, principally reflecting repurchases and dividends.
- Book value per common share was $63.81, up 7% from March 31, 2011. Fixed maturities and short-term securities represented 93% of investments; the fixed-maturity portfolio’s average credit quality was Aa2.
Material changes and segment performance
- Underwriting overall: The combined ratio improved as catastrophe losses declined to $168 million from $186 million and net favorable prior-year reserve development increased to $304 million from $237 million. The reported ratio therefore includes a substantial benefit from reserve releases; excluding catastrophe losses and prior-year development, the loss ratio improved 0.6 points year over year.
- Business Insurance: Earned premiums increased 5% to $2.88 billion and operating income rose 1% to $612 million. Its combined ratio improved to 89.6% from 94.9%. Results benefited from $248 million of favorable prior-year development and lower catastrophe losses ($53 million versus $112 million); underlying underwriting margin was slightly lower, excluding those items.
- Financial, Professional & International Insurance: Earned premiums declined 5% to $737 million, while operating income increased 24% to $149 million. The combined ratio improved to 87.8% from 95.3%, reflecting lower large and catastrophe losses and $46 million of favorable prior-year development. No catastrophe losses were recorded in the quarter.
- Personal Insurance: Earned premiums rose 3% to $1.91 billion, but operating income fell 36% to $108 million. The combined ratio worsened to 97.8% from 94.2%, principally as catastrophe losses increased to $115 million from $53 million and favorable prior-year development declined to $10 million from $55 million.
- Net investment income fell $39 million, mainly because of lower reinvestment yields on fixed maturities. Average pretax portfolio yield declined to 4.3% from 4.4%.
- Income tax expense rose to $271 million from $130 million. Management attributed the year-over-year net-income decline in part to a $104 million benefit from resolution of prior-year tax matters in Q1 2011.
Outlook, risks, and unusual items
- Management outlook: Travelers expected renewal price increases to continue during the remainder of 2012 and projected higher underlying underwriting margins than in 2011 across all three segments, subject to stated assumptions about losses and weather. It also expected fixed-maturity investment returns to be slightly lower than in recent periods because of low reinvestment yields. These are forward-looking expectations, not guarantees.
- The company cautioned that competitive pricing, weak or uncertain economic conditions, low interest rates, catastrophe activity, claims trends, and the success of rate and expense initiatives could affect premiums and profitability. It noted that its direct-to-consumer Personal Insurance business was expected to remain unprofitable for a number of years as it grows and matures.
- Management expected 2012 dividends and repurchases together likely not to exceed operating income. During Q1, Travelers repurchased 6.0 million shares for about $350 million, with $3.26 billion of authorization remaining. On April 19, it announced a 12% increase in its quarterly dividend, from $0.41 to $0.46 per share.
- The catastrophe-bond attachment point was reset upward for May 2012–April 2013: index-based recovery begins at $3.50 billion of covered-area losses, versus $2.21 billion previously. The company said it may seek additional catastrophe protection.
- Reserve and litigation exposures: Management warned that asbestos and environmental liabilities could develop materially beyond current reserves, but said potential additional amounts could not be reasonably estimated. Net asbestos reserves were $2.38 billion and net environmental reserves $317 million at March 31.
- In asbestos direct-action litigation, a district court ruled on March 1, 2012 that Travelers Property Casualty Corp. was not obligated to fund settlements of up to $502 million in stated settlement amounts; plaintiffs appealed. Separately, a $251 million reinsurance judgment was recognized as a recoverable, but related interest—$216 million as of the January 2012 appellate decision—was treated as an unrecognized gain contingency while further appeal remained possible. Travelers also anticipated an approximately $90 million allocation from a separate class settlement, subject to appeal, which was not recognized.
- Unfunded investment commitments were $1.20 billion. Quantifiable maximum indemnification obligations from sales of businesses were $1.22 billion, of which $9 million was recognized on the balance sheet. The filing also describes guarantees, some of which have no stated maximum payment amount.
Important facts for investors to verify
- How much of reported underwriting performance depends on favorable prior-year reserve development, and whether that development persists.
- Whether catastrophe losses, especially in Personal Insurance, remain elevated and how the higher catastrophe-bond attachment point affects retained exposure.
- Trends in reinvestment yields and investment income, given the portfolio’s material contribution to earnings.
- Developments in asbestos and environmental claims, the appeals concerning the asbestos settlements, and collection or appeal outcomes for the reinsurance judgment and class settlement.
- Whether renewal pricing and expense actions deliver expected margin improvement without materially weakening retention or new-business volumes.