The Travelers Companies, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated results; dollar amounts are in millions unless stated otherwise. Travelers is a property-and-casualty insurer with Business Insurance, Financial, Professional & International Insurance, and Personal Insurance segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $6,388 | $6,179 | $12,666 | $12,298 |
| Earned premiums | $5,503 | $5,340 | $10,874 | $10,570 |
| Net income (loss) | $(364) | $670 | $475 | $1,317 |
| Diluted EPS | $(0.88) | $1.35 | $1.10 | $2.60 |
| GAAP combined ratio | 125.0% | 95.2% | 110.1% | 95.8% |
| Net investment income | $758 | $762 | $1,537 | $1,515 |
Q2 swung to a loss primarily because catastrophe losses rose to $1.67 billion, versus $439 million a year earlier. Favorable prior-year reserve development was $168 million, down from $384 million. For the first half, catastrophe losses were $1.85 billion versus $910 million, and favorable reserve development was $405 million versus $678 million. Underlying underwriting margins also weakened modestly, reflecting loss-cost increases, weather and fire losses, and higher expenses.
- Segment results, Q2 / first half operating income (loss): Business Insurance $11 / $615; Financial, Professional & International $164 / $284; Personal Insurance $(471) / $(301). Personal Insurance was especially affected by catastrophe losses of $957 million in Q2 and $1.01 billion in the first half.
- Cash flow: First-half operating cash flow was $901 million, compared with $1.05 billion in 2010. Investing activities provided $655 million versus $2.20 billion; financing activities used $1.49 billion versus $3.23 billion. Period-end cash was $273 million.
- Balance sheet and capital: Total assets were $106.47 billion; investments totaled $72.99 billion. Claims reserves were $52.60 billion, total debt $6.60 billion, and shareholders’ equity $25.01 billion. Debt-to-total-capital was 20.9%, or 22.5% excluding after-tax net unrealized investment gains. Book value per common share was $59.62.
- Liquidity: Holding-company cash and short-term investments were $2.43 billion, with a weighted average maturity of 48 days. A $1.0 billion credit facility, expiring in 2013, supported an $800 million commercial-paper program; $100 million was outstanding.
Changes and notable items
- Premiums increased 3% year over year for both Q2 and the first half. Business and Personal Insurance premiums grew; Financial, Professional & International premiums declined.
- Q2 claims and claim-adjustment expenses increased 50% to $5.14 billion; first-half expenses rose 25% to $8.52 billion. The combined ratio exceeded 100% in both periods, indicating an underwriting loss before investment and other income.
- First-half net income included a $104 million benefit from favorable resolution of prior-year tax matters. Q2 net realized investment gains were $19 million, compared with a $31 million loss in Q2 2010.
- Travelers repurchased 22.8 million shares for $1.34 billion in the first half and paid $329 million in dividends. Remaining repurchase authorization was $5.17 billion at June 30. Preferred shares held by the company’s 401(k) plan were converted into 1.52 million common shares.
- On June 17, Travelers acquired a 43% interest in Brazilian surety insurer JMalucelli for approximately $410 million; it is accounted for under the equity method.
Outlook, risks and contingencies
- Management expected strong retention to continue. It anticipated improving Business Insurance renewal premium trends, broadly stable Financial, Professional & International renewal trends, and positive—but slightly moderating—Personal Insurance renewal changes. No specific full-year earnings guidance was provided.
- Management expected underlying underwriting margins in Business Insurance and Financial, Professional & International to remain generally consistent with first-half levels; Personal Insurance margins were expected to improve, assuming weather consistent with expectations. The direct-to-consumer initiative was expected to remain unprofitable for several years.
- Management expected fixed-maturity investment returns to be slightly lower in the remainder of 2011 and early 2012 due to lower reinvestment yields; short-term rates were expected to remain near historic lows. The company planned to continue repurchases, with second-half repurchases expected to exceed second-half operating income by about $400 million, subject to multiple factors.
- Catastrophe activity, reserve estimation, reinsurance collectability, weak economic conditions, investment-market volatility and competitive pricing are key risks. A new hurricane-model version could materially increase modeled loss estimates; its effects were not yet clear. Rising interest rates could reduce fixed-maturity values and shareholders’ equity.
- Asbestos and environmental reserves remain uncertain. Net asbestos reserves were $2.44 billion at June 30; net environmental reserves were $388 million, including a $76 million Q2 reserve increase. Management said additional liabilities could exceed reserves and could materially affect future results, though the amount could not be reasonably estimated.
- Appeals were pending concerning court orders requiring Travelers Property Casualty Corp. to fund asbestos-related settlements of up to $412 million and $90 million, plus prejudgment interest. A separate $420 million reinsurance judgment, including $169 million interest, was under appeal; the interest was treated as a gain contingency and was not recognized in the financial statements.
- A broker antitrust settlement for $6.75 million was subject to final court approval. The filing also identified potential market disruption from the approaching U.S. statutory debt limit, including possible effects on the value and liquidity of investments.
Investor verification priorities
- Review the scale and composition of catastrophe losses, and whether the elevated combined ratio and weakened underlying margins persist.
- Assess reserve development and the adequacy of asbestos, environmental and other claims reserves, including the pending settlement appeals.
- Verify the impact of the updated catastrophe model and the effectiveness and collectability of reinsurance protections.
- Monitor investment income, portfolio valuations, interest-rate exposure, and the concentration and credit quality of investments.
- Evaluate whether planned share repurchases remain appropriate given catastrophe exposure, capital needs, and the company’s stated outlook.