Business context and reporting period
The Travelers Companies, Inc. is a property and casualty insurer serving businesses, public entities, and individuals through three segments: Business Insurance; Financial, Professional & International Insurance; and Personal Insurance. This Form 10-K covers the fiscal year ended December 31, 2009; quarterly results are also reported below where relevant. Financial statements are audited under U.S. GAAP, with an unqualified audit opinion.
Key financial metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue | $24.68 billion | $24.48 billion |
| Net income | $3.62 billion | $2.92 billion |
| Diluted EPS | $6.33 | $4.81 |
| Net earned premiums | $21.42 billion | $21.58 billion |
| Net investment income | $2.78 billion | $2.79 billion |
| Net realized investment gains (losses) | $17 million | $(415) million |
| GAAP combined ratio | 89.2% | 91.9% |
| Operating cash flow | $4.23 billion | $3.14 billion |
| Total assets | $109.56 billion | $109.63 billion |
| Total debt | $6.53 billion | $6.18 billion |
| Shareholders’ equity | $27.42 billion | $25.32 billion |
Net income rose 24% year over year; diluted EPS increased 32%, aided by substantial share repurchases. Fourth-quarter 2009 net income was $1.285 billion, versus $801 million in fourth-quarter 2008. The 2009 combined ratio included $457 million of catastrophe losses and $1.33 billion of favorable prior-year reserve development; a ratio below 100% generally indicates an underwriting profit.
At year-end, investments totaled $74.97 billion, with 94% in fixed-maturity and short-term securities. The fixed-maturity portfolio had a weighted-average credit quality of Aa2; 2.7% was below investment grade. Holding-company liquidity was $2.14 billion. Debt-to-total-capital was 19.2%, or 20.3% excluding after-tax unrealized investment gains.
Material changes versus the prior comparable period
- Revenue increased modestly, but earned premiums declined 1% as weaker economic activity reduced commercial insured exposures; Personal Insurance premiums grew.
- Lower catastrophe costs—$457 million in 2009 versus $1.41 billion in 2008, including related assessments—were a key driver of improved earnings and the combined ratio.
- Favorable prior-year reserve development declined to $1.33 billion from $1.54 billion. The 2009 benefit included $1.03 billion in Business Insurance, $168 million in Financial, Professional & International, and $135 million in Personal Insurance.
- Investment income was nearly flat year over year but remained below 2007’s $3.76 billion. The 2009 result included a $159 million pretax gain on the sale of Verisk shares; realized investment results nevertheless improved from 2008’s loss.
- Operating cash flow improved, while total debt rose by about $346 million. The company repurchased 69.4 million shares for $3.30 billion during 2009; year-end shares outstanding were 520.3 million, down from 585.1 million.
- Net unrealized investment gains improved substantially: after-tax accumulated unrealized gains were $1.86 billion at year-end, compared with losses of $144 million in 2008.
Outlook, management commentary, risks, and unusual items
- 2010 outlook: Management expected high retention to continue. Renewal premium changes in commercial and international businesses were expected to be similar to 2009 or modestly higher, with rate increases largely offset by lower insured exposures. Management anticipated modestly lower underwriting profitability than in 2009, reflecting competitive conditions and modestly higher loss costs.
- Investments and capital: Management expected fixed-maturity returns to be broadly consistent with recent periods, while low short-term rates and challenged non-fixed-maturity returns remained concerns. The company expected to repurchase $3.5–$4.0 billion of shares in 2010, subject to earnings, capital, regulatory, catastrophe, and market conditions.
- Insurance risks: Catastrophes, changing weather patterns, catastrophe-model uncertainty, inflation and adverse reserve development could materially affect results. Asbestos and environmental reserves are judgmental and subject to potentially material revision; net reserves for these claims totaled approximately $3.15 billion at year-end.
- Reinsurance and credit: Total reinsurance recoverables were $12.82 billion, including $523 million allowance for uncollectible reinsurance. The company remains liable to policyholders if reinsurers fail to pay. Large-deductible business also exposes the company to policyholder credit risk.
- Investment and market exposures: Risks include municipal-bond credit deterioration, interest-rate and credit-spread movements, mortgage-related securities, and foreign-exchange effects. A hypothetical 100-basis-point rise in interest rates implied an estimated $2.34 billion decline in fair value of modeled market-sensitive instruments; this is a sensitivity estimate, not a forecast.
- Liquidity and obligations: The $1.0 billion revolving credit facility was due to expire in June 2010 and backed an $800 million commercial-paper program, of which $100 million was outstanding at year-end. Insurance-subsidiary dividends to the parent are regulatorily restricted. All insurance subsidiaries exceeded statutory risk-based-capital requirements.
- Legal and unusual items: The Supreme Court ruled in Travelers’ favor in asbestos direct-action litigation, but related settlements remained contingent on further proceedings. A proposed PPG asbestos settlement remained subject to court and plan contingencies. The company also disclosed an ongoing SEC inquiry concerning 2004 merger accounting adjustments; management continued to believe its accounting treatment was appropriate. Adoption of updated impairment guidance increased 2009 net income by approximately $65 million after tax, or $0.11 per share.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor also gave an unqualified opinion on internal control effectiveness.
Important facts for investors to verify
- How much of 2009 earnings depended on favorable reserve development and unusually lower catastrophe losses, and whether those benefits persist.
- Underlying rate adequacy, exposure trends, and loss-cost development by segment, especially in Personal Insurance and commercial lines.
- Asbestos and environmental reserve assumptions, claim trends, litigation outcomes, and the status of contingent settlements.
- Credit quality and collectability of reinsurance recoverables, including exposure to reinsurers and structured-settlement annuity providers.
- Municipal and mortgage-related investment exposures, impairment assumptions, and sensitivity of equity to interest-rate changes.
- Holding-company liquidity, the credit-facility renewal or replacement, subsidiary dividend capacity, and whether planned 2010 repurchases remained consistent with capital needs.