The Travelers Companies, Inc. — Q1 2011 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2011, compared with the first quarter of 2010. Travelers is a property and casualty insurer with Business Insurance, Financial, Professional & International Insurance, and Personal Insurance segments.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $6.278 billion | $6.119 billion | Up 3% |
| Net income | $839 million | $647 million | Up 30% |
| Diluted EPS | $1.92 | $1.25 | Up 54% |
| Earned premiums | $5.371 billion | $5.230 billion | Up 3% |
| Net investment income | $779 million | $753 million | Up 3% |
| GAAP combined ratio | 94.7% | 96.4% | Improved 1.7 points |
| Operating cash flow | $633 million | $531 million | Up $102 million |
Net income included a $104 million benefit from favorable resolution of prior-year tax matters. Catastrophe losses were $186 million ($122 million after tax), versus $471 million in Q1 2010. Net favorable prior-year reserve development was $237 million ($155 million after tax), compared with $294 million. Excluding catastrophe losses and reserve development, the consolidated loss ratio was 2.5 points higher year over year, reflecting weaker underlying underwriting margins and higher non-catastrophe weather losses. The EPS increase also reflected substantial share repurchases.
Segments
- Business Insurance: Operating income was $604 million, up 7%; earned premiums rose 4% to $2.745 billion. Combined ratio was 94.9%, versus 91.4%, as lower catastrophe losses were more than offset in the ratio by reduced favorable reserve development and weaker underlying margins.
- Financial, Professional & International: Operating income was $120 million, up 40%; earned premiums fell 6% to $773 million. Combined ratio improved to 95.3% from 98.9%, largely due to lower catastrophe losses. Written premiums declined, particularly in International.
- Personal Insurance: Operating income was $170 million, versus $59 million; earned premiums rose 4% to $1.853 billion. Combined ratio improved to 94.2% from 102.6%, primarily reflecting sharply lower catastrophe losses and better prior-year development. Underlying loss costs increased, including non-catastrophe weather-related losses.
Financial position, cash flow and capital
- At March 31, total assets were $105.252 billion, investments $72.391 billion, shareholders’ equity $25.243 billion and debt $6.611 billion. Debt was unchanged from year-end 2010; debt-to-total-capital was 20.8%, or 22.0% excluding after-tax unrealized investment gains.
- Cash at period-end was $239 million. Operating cash flow was $633 million; investing activities provided $530 million; financing activities used $1.128 billion, primarily reflecting share repurchases and dividends.
- Holding-company cash and short-term investments totaled $2.86 billion, with a 56-day weighted average maturity. The company also reported an undrawn $1.0 billion credit facility supporting an $800 million commercial paper program, of which $100 million was outstanding.
- Travelers repurchased 18.9 million shares for approximately $1.10 billion, at an average $58.23 per share; $5.41 billion of authorization remained. Q1 dividends paid were $155 million. On April 21, 2011, the company announced a 14% increase in its quarterly dividend, from $0.36 to $0.41 per share.
- Average pretax investment yield was 4.4%, compared with 4.1%. Fixed-maturity portfolio credit quality averaged Aa2; below-investment-grade securities were 3.0% of the portfolio.
Changes, outlook and management commentary
- Premiums and revenue increased, but segment trends varied: Business and Personal premiums grew, while Financial, Professional & International premiums declined. Net written premiums rose 4% overall.
- Management expected strong retention to continue. For the remainder of 2011, it anticipated slightly improving Business Insurance renewal pricing/exposure trends, broadly stable Financial, Professional & International renewal trends, and positive but somewhat moderating Personal Auto renewal changes.
- Management expected modestly lower underwriting profitability in Business Insurance and Financial, Professional & International versus 2010, and modestly higher profitability in Personal Insurance. The direct-to-consumer Personal Insurance initiative was expected to remain unprofitable for several years.
- Management expected fixed-maturity investment returns to be slightly lower for the rest of 2011 because of lower reinvestment yields; short-term rates were expected to remain near historic lows. It expected non-fixed-maturity investment income to be generally consistent with 2010.
- Travelers expected to continue repurchases in 2011, with total repurchases expected to exceed annual operating income but be lower than in 2010. The amount remained subject to earnings, capital needs, catastrophe losses, regulation, strategic opportunities and market conditions.
- Management cautioned that weak or uncertain economic conditions could affect exposures, premiums and profitability. Catastrophe losses are unpredictable; a newly released catastrophe model could materially increase modeled hurricane estimates, though the impact was not yet clear. Japan’s earthquake and tsunami could temporarily raise auto repair costs through replacement-parts disruption.
Contingencies and unusual items
- Asbestos and environmental: Net asbestos reserves were $2.502 billion and net environmental reserves $336 million at March 31. The company warned that uncertain litigation, coverage interpretations, claim development and reinsurance recoveries could require additional reserves or material future charges; potential additional liabilities could not be reasonably estimated.
- Asbestos settlement dispute: A bankruptcy court ordered Travelers Property Casualty Corp. to fund settlements of up to $412 million and $90 million, plus prejudgment interest. The company appealed; the appeals were pending at filing.
- Reinsurance judgment: A subsidiary had a recorded $251 million reinsurance recovery judgment. A further $169 million of awarded prejudgment interest was treated as a gain contingency and not recognized; the judgment was appealed. Post-judgment interest was accruing.
- Broker antitrust litigation: The company agreed to pay $6.75 million to settle, subject to court approval.
- Brazil investment: Travelers planned to acquire approximately 43% of J. Malucelli for about $393 million at the March 31 exchange rate, with closing expected in Q2 2011, subject to customary conditions. The final U.S.-dollar cost depended on exchange rates.
- Unfunded private-equity and real-estate partnership commitments totaled $1.23 billion. Quantifiable guarantees for certain investments and related third-party loans totaled $84 million; quantifiable sale-related indemnification obligations totaled $1.35 billion, of which $9 million was recorded.
Important facts for investors to verify
- How much of earnings growth is repeatable after adjusting for the $104 million tax benefit, lower catastrophe losses, prior-year reserve development and share repurchases.
- Whether underlying loss costs, non-catastrophe weather losses and renewal pricing trends support the company’s segment outlook.
- Subsequent development in asbestos and environmental reserves, the pending settlement appeals, and the reinsurance judgment and unrecognized interest.
- Actual investment income and realized gains or losses as reinvestment yields, market values and alternative-asset performance change.
- Execution and final cost of the J. Malucelli investment, and the pace and funding of planned share repurchases and dividends.