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TRV > SEC Filings for TRV > Form 10-K on 13-Feb-2014All Recent SEC Filings

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Form 10-K for TRAVELERS COMPANIES, INC.


13-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the Company's financial condition and results of operations.

On November 1, 2013, the Company acquired all of the issued and outstanding shares of Dominion for an aggregate purchase price of approximately $1.034 billion. The results of operations of the acquired business are reported in the Company's Financial, Professional & International Insurance segment from the closing date.

FINANCIAL HIGHLIGHTS

2013 Consolidated Results of Operations


Net income of $3.67 billion, or $9.84 per share basic and $9.74 per share diluted


Net earned premiums of $22.64 billion


Catastrophe losses of $591 million ($387 million after-tax)


Net favorable prior year reserve development of $840 million
($552 million after-tax)


GAAP combined ratio of 89.8%


Net investment income of $2.72 billion ($2.19 billion after-tax)


Benefit of $91 million ($59 million after-tax) from settlement of legal matter


Benefit of $63 million from resolution of prior year tax matters


Operating cash flows of $3.82 billion


Net realized investment gains of $166 million ($106 million after-tax)

2013 Consolidated Financial Condition


Total investments of $73.16 billion; fixed maturities and short-term securities comprise 93% of total investments


Total assets of $103.81 billion


Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 20.4% (21.3% excluding net unrealized investment gains, net of tax)


Repurchased 28.4 million common shares for a total cost of $2.40 billion under share repurchase authorization


Share repurchase authorization increased by $5.0 billion in 2013


Shareholders' equity of $24.80 billion


Book value per common share of $70.15


Holding company liquidity of $1.59 billion


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CONSOLIDATED OVERVIEW

Consolidated Results of Operations

(for the year ended December 31, in millions except per share amounts)         2013       2012       2011
Revenues
Premiums                                                                     $ 22,637   $ 22,357   $ 22,090
Net investment income                                                           2,716      2,889      2,879
Fee income                                                                        395        323        296
Net realized investment gains                                                     166         51         55
Other revenues                                                                    277        120        126


Total revenues                                                                 26,191     25,740     25,446


Claims and expenses
Claims and claim adjustment expenses                                           13,307     14,676     16,276
Amortization of deferred acquisition costs                                      3,821      3,910      3,876
General and administrative expenses                                             3,757      3,610      3,556
Interest expense                                                                  361        378        386


Total claims and expenses                                                      21,246     22,574     24,094


Income before income taxes                                                      4,945      3,166      1,352
Income tax expense (benefit)                                                    1,272        693        (74 )


Net income                                                                   $  3,673   $  2,473   $  1,426




Net income per share
Basic                                                                        $   9.84   $   6.35   $   3.40




Diluted                                                                      $   9.74   $   6.30   $   3.36




GAAP combined ratio
Loss and loss adjustment expense ratio                                           57.9 %     64.9 %     72.9 %
Underwriting expense ratio                                                       31.9       32.2       32.2


GAAP combined ratio                                                              89.8 %     97.1 %    105.1 %

Incremental impact of direct to consumer initiative on GAAP combined ratio 0.5 % 0.8 % 0.9 %

The following discussions of the Company's net income and segment operating income (loss) are presented on an after-tax basis. Discussions of the components of net income and segment operating income are presented on a pretax basis, unless otherwise noted. Discussions of earnings per common share are presented on a diluted basis.

Overview

Diluted net income per share of $9.74 in 2013 increased by 55% over diluted net income per share of $6.30 in 2012. Net income of $3.67 billion in 2013 increased by 49% over net income of $2.47 billion in 2012. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in net income primarily reflected the pretax impacts of (i) lower catastrophe losses, (ii) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), (iii) an increase in net realized investment gains and (iv) a gain from the settlement of a legal proceeding, partially offset by (v) lower net investment income and (vi) lower net favorable prior year reserve development. The improvement in underlying underwriting margins primarily resulted from the impact of earned pricing that exceeded loss cost trends in each of the Company's business segments. Partially offsetting this net pretax increase


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in income was the related tax expense. Additionally, net income in 2013 benefited from a reduction in income tax expense resulting from the resolution of prior year tax matters. The effective tax rate in 2013 was higher than in 2012. This resulted from interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income, partially offset by the resolution of prior year tax matters discussed above. Catastrophe losses in 2013 were $591 million, compared with $1.86 billion in 2012. Net favorable prior year reserve development in 2013 was $840 million, compared with $940 million in 2012.

Diluted net income per share of $6.30 in 2012 increased by 88% over diluted net income per share of $3.36 in 2011. Net income of $2.47 billion in 2012 increased by 73% over net income of $1.43 billion in 2011. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in net income primarily reflected the pretax impact of (i) higher underlying underwriting margins, (ii) a decline in catastrophe losses and (iii) higher net favorable prior year reserve development. The improvement in underlying underwriting margins primarily resulted from lower non-catastrophe weather-related losses in the Business Insurance and Personal Insurance segments and the impact of earned pricing that exceeded loss cost trends in the Business Insurance and Financial, Professional & International Insurance segments. Partially offsetting this pretax increase was the related tax expense. Additionally, net income in 2011 benefited from a reduction in income tax expense resulting from the resolution of various prior year tax matters. The effective tax rate in 2012 was higher than in 2011. This resulted from interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income, and the resolution of prior year tax matters in 2011 discussed above. Catastrophe losses in 2012 were $1.86 billion, compared with $2.56 billion in 2011. Net favorable prior year reserve development in 2012 was $940 million, compared with $715 million in 2011.

Revenues

Earned Premiums

Earned premiums in 2013 were $22.64 billion, $280 million or 1% higher than in 2012. In the Business Insurance segment, earned premiums in 2013 increased by 3% over 2012. In the Financial, Professional & International Insurance segment, earned premiums in 2013 increased by 6% over 2012. In the Personal Insurance segment, earned premiums in 2013 decreased by 4% from 2012.

Earned premiums in 2012 were $22.36 billion, $267 million or 1% higher than in 2011. In the Business Insurance segment, earned premiums in 2012 increased by 3% over 2011. In the Financial, Professional & International Insurance segment, earned premiums in 2012 decreased by 4% from 2011. In the Personal Insurance segment, earned premiums in 2012 increased by less than 1% over 2011.

Factors contributing to the changes in earned premiums in each segment in 2013 and 2012 compared with the respective prior year are discussed in more detail in the segment discussions that follow.


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Net Investment Income

    The following table sets forth information regarding the Company's
investments.

     (for the year ended December 31, in millions)     2013       2012       2011
     Average investments(1)                          $ 70,697   $ 69,863   $ 70,471
     Pretax net investment income                       2,716      2,889      2,879
     After-tax net investment income                    2,186      2,316      2,330
     Average pretax yield(2)                              3.8 %      4.1 %      4.1 %
     Average after-tax yield(2)                           3.1 %      3.3 %      3.3 %


--------------------------------------------------------------------------------
    (1)


Excludes net unrealized investment gains and losses, net of tax, and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.

(2)
Excludes net realized and unrealized investment gains and losses.

Net investment income in 2013 was $2.72 billion, $173 million or 6% lower than in 2012. Net investment income from fixed maturity investments in 2013 was $2.31 billion in 2013, a decrease of $129 million from 2012, primarily resulting from lower long-term reinvestment yields available in the market. Net investment income from non-fixed maturity investments was $432 million in 2013, a decrease of $44 million from 2012, primarily reflecting lower results from the Company's real estate partnership investments.

Net investment income in 2012 was $2.89 billion, $10 million or less than 1% higher than in 2011. Net investment income from fixed maturity investments was $2.44 billion in 2012, a decrease of $104 million from 2011, primarily resulting from lower long-term reinvestment yields available in the market. Net investment income generated by non-fixed maturity investments was $476 million in 2012, an increase of $121 million over 2011, primarily driven by improved results from the Company's real estate partnerships and hedge fund investments. On an after-tax basis, net investment income in 2012 was $14 million, or less than 1% lower than in 2011, reflecting a higher proportion of taxable net investment income in 2012 compared with 2011.

Fee Income

The National Accounts market in the Business Insurance segment is the primary source of the Company's fee-based business. The $72 million and $27 million increases in fee income in 2013 and 2012, respectively, compared with the respective prior years are described in the Business Insurance segment discussion that follows.

Net Realized Investment Gains

    The following table sets forth information regarding the Company's net
pretax realized investment gains.

         (for the year ended December 31, in millions)   2013    2012    2011
         Net Realized Investment Gains
         Other-than-temporary impairment losses            (15 )   (15 )   (25 )
         Other net realized investment gains               181      66      80


         Net realized investment gains                   $ 166   $  51   $  55


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Other Net Realized Investment Gains

Other net realized gains in 2013 of $181 million were primarily driven by $115 million of net realized gains associated with U.S. Treasury futures contracts (which require daily mark-to-market settlement and are used to shorten the duration of the Company's fixed maturity investment portfolio). The remaining $66 million of other net realized investment gains in 2013 were primarily driven by $41 million of net realized investment gains related to fixed maturity investments, $15 million of net realized investment gains related to equity securities and $10 million of net realized investment gains related to other investments.

Other net realized investment gains in 2012 of $66 million were primarily driven by $61 million of net realized investment gains related to fixed maturity investments, $19 million of net realized investment gains related to real estate and $8 million of net realized investment gains related to equity securities. These net realized investment gains were partially offset by $14 million of net realized investment losses associated with U.S. Treasury futures contracts and $8 million of net realized investment losses related to other investments.

Other net realized investment gains in 2011 of $80 million were primarily driven by $52 million of net realized investment gains related to fixed maturity investments, $46 million of net realized investment gains related to equity securities and $41 million of net realized investment gains related to other investments, partially offset by net realized investment losses of $62 million associated with U.S. Treasury futures contracts.

Other Revenues

Other revenues in 2013 included a $91 million gain from the settlement of a legal proceeding, which is discussed in more detail in note 16 of notes to the consolidated financial statements. Other revenues in 2013 also included a $20 million gain from the sale of renewal rights related to the Company's National Flood Insurance Program business. The remainder of other revenues in all years presented primarily consisted of installment premium charges.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2013 were $13.31 billion, $1.37 billion or 9% lower than in 2012, primarily reflecting (i) a decline in catastrophe losses and (ii) the impact of lower volumes of insured exposures (excluding the impact of the acquisition of Dominion), partially offset by
(iii) the impact of loss cost trends, (iv) the impact of the acquisition of Dominion and (v) lower net favorable prior year reserve development. Catastrophe losses in 2013 and 2012 were $591 million and $1.86 billion, respectively. Catastrophe losses in 2013 resulted from multiple tornado, wind and hail storms in several regions of the United States, as well as floods in Alberta, Canada and Storm Xaver in the United Kingdom that impacted the Financial, Professional & International Insurance segment. Catastrophe losses in 2012 primarily resulted from Storm Sandy, as well as multiple tornado, wind and hail storms in several regions of the United States. Net favorable prior year reserve development in 2013 and 2012 was $840 million and $940 million, respectively. Net favorable prior year reserve development in 2013 was reduced by a $42 million charge that was precipitated by legislation in New York enacted during the first quarter of 2013 related to the New York Fund for Reopened Cases for workers' compensation. Factors contributing to net favorable prior year reserve development in each segment are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.

Claims and claim adjustment expenses in 2012 were $14.68 billion, $1.60 billion or 10% lower than in 2011. The decrease primarily reflected (i) a decline in catastrophe losses, (ii) lower levels of


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non-catastrophe weather-related losses and (iii) higher net favorable prior year reserve development, partially offset by (iv) the impact of loss cost trends. Catastrophe losses in 2012 and 2011 were $1.86 billion and $2.56 billion, respectively. Catastrophe losses in 2011 primarily resulted from Hurricane Irene and Tropical Storm Lee, multiple tornadoes and hail storms in the Midwest and Southeast regions of the United States and severe winter storms throughout the United States. Catastrophe losses in 2011 also included losses from floods in Thailand and an earthquake in Japan that impacted the Financial, Professional & International Insurance segment. Net favorable prior year reserve development in 2012 and 2011 was $940 million and $715 million, respectively. Factors contributing to net favorable prior year reserve development in each segment are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.

Significant Catastrophe Losses

The Company defines a "catastrophe" as an event that:


is designated a catastrophe by internationally recognized organizations that track and report on insured losses from catastrophic events, such as Property Claim Services (PCS) for events in the United States and Canada; and


the Company's estimates of its ultimate losses before reinsurance and taxes exceed a pre-established dollar threshold.

The Company's threshold for disclosing catastrophes is determined at its reportable segment level, or at a combination thereof, and ranged from approximately $17 million to $30 million of losses before reinsurance and taxes.

The following table presents for significant catastrophes the amount of losses recorded in each of the years ended December 31, 2013, 2012, and 2011, and the amount of related net unfavorable (favorable) prior year reserve development recognized in subsequent years. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes.

(for the year ended December 31, in millions, pretax and net of reinsurance)   2013     2012     2011
2011
PCS Serial Number:
35-Severe winter storms                                                        $  (6 ) $     1   $ 100
42-Severe thunderstorms and tornadoes                                             (2 )      (5 )   130
43-Severe thunderstorms and tornadoes                                             (1 )       2     149
44-Severe thunderstorms and tornadoes                                             (9 )     (10 )   121
46-Severe thunderstorms and tornadoes (including Tuscaloosa, AL)                   2       (76 )   648
48-Severe thunderstorms and tornadoes (including Joplin, MO)                     (14 )     (24 )   430
59-Hurricane Irene                                                               (17 )     (47 )   375
61-Tropical Storm Lee                                                            (21 )      (7 )   119
2012
PCS Serial Number:
67-Severe wind and hail storms                                                    (2 )     140
74-Severe wind and hail storms                                                   (20 )     171
76-Severe wind and hail storms                                                   (10 )     148
83-Severe wind storms                                                              2       136
90-Storm Sandy                                                                   (52 )   1,024
2013
PCS Serial Number:
93-Severe wind and hail storms                                                   114
15-Severe wind and hail storms                                                   128


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Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in 2013 was $3.82 billion, $89 million or 2% lower than in 2012. Amortization of deferred acquisition costs in 2012 was $3.91 billion, $34 million or 1% higher than in 2011. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.

General and Administrative Expenses

General and administrative expenses in 2013 were $3.76 billion, $147 million or 4% higher than in 2012. General and administrative expenses in 2012 were $3.61 billion, $54 million or 2% higher than in 2011. General and administrative expenses are discussed in more detail in the segment discussions that follow.

Interest Expense

Interest expense in 2013, 2012 and 2011 was $361 million, $378 million and $386 million, respectively. The declines both in 2013 and 2012 compared with the respective prior years primarily reflected lower average levels of debt outstanding.

Income Tax Expense (Benefit)

Income tax expense in 2013 was $1.27 billion, $579 million or 84% higher than in 2012, primarily reflecting the impact of a $1.66 billion increase in underwriting margins (including the impacts of decreases in catastrophe losses and net favorable prior year reserve development), partially offset by the impact of lower net investment income and a reduction in income tax expense of $63 million resulting from the resolution of prior year tax matters. Income tax expense in 2012 was $693 million, compared to an income tax benefit of $74 million in 2011. The increase in income tax expense of $767 million in 2012 from 2011 primarily reflected the $1.77 billion increase in underwriting margins in 2012 (including the impacts of a decrease in catastrophe losses and an increase in net favorable prior year reserve development) over 2011 and the $121 million increase in net investment income from non-fixed maturity investments over 2011, as well as the reduction in income tax expense of $104 million in 2011 resulting from the resolution of prior year tax matters.

The Company's effective tax rate was 26%, 22% and (5)% in 2013, 2012 and 2011, respectively. The effective tax rates in all years were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Company's income tax provision. The effective tax rate of (5%) in 2011 also reflected the impact of the significant underwriting loss that primarily resulted from catastrophe losses. In addition, the effective tax rates for 2013 and 2011 were reduced by the impact of the resolution of prior year tax matters.

GAAP Combined Ratios

The consolidated GAAP combined ratio of 89.8% in 2013 was 7.3 points lower than the consolidated GAAP combined ratio of 97.1% in 2012.

The consolidated loss and loss adjustment expense ratio of 57.9% in 2013 was 7.0 points lower than the consolidated loss and loss adjustment expense ratio of 64.9% in 2012. Catastrophe losses accounted for 2.6 points and 8.3 points of the 2013 and 2012 loss and loss adjustment expense ratios, respectively. The 2013 and 2012 loss and loss adjustment expense ratios included 3.7 points and 4.2 points of benefit from net favorable prior year reserve development, respectively. The consolidated 2013 loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development ("underlying loss and loss adjustment expense ratio") was 1.8 points lower than the 2012


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ratio on the same basis, primarily reflecting the improvement in underlying underwriting margins discussed in the "Overview" section above.

The consolidated underwriting expense ratio of 31.9% in 2013 was lower than the consolidated underwriting expense ratio of 32.2% in 2012, primarily reflecting the impact of growth in earned premiums in 2013.

The consolidated GAAP combined ratio of 97.1% in 2012 was 8.0 points lower than the consolidated GAAP combined ratio of 105.1% in 2011.

The consolidated loss and loss adjustment expense ratio of 64.9% in 2012 was 8.0 points lower than the consolidated loss and loss adjustment expense ratio of 72.9% in 2011. Catastrophe losses accounted for 8.3 points and 11.6 points of the 2012 and 2011 loss and loss adjustment expense ratios, respectively. The 2012 and 2011 loss and loss adjustment expense ratios included 4.2 points and 3.2 points of benefit from net favorable prior year reserve development, respectively. The consolidated 2012 loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development ("underlying loss and loss adjustment expense ratio") was 3.7 points lower than the 2011 ratio on the same basis, primarily reflecting the improvement in underlying underwriting margins discussed in the "Overview" section above.

The consolidated underwriting expense ratio of 32.2% in 2012 was level with the consolidated underwriting expense ratio of 32.2% in 2011.

Written Premiums

    Consolidated gross and net written premiums were as follows:

                                                           Gross Written Premiums
   (for the year ended December 31, in millions)         2013       2012       2011
   Business Insurance                                  $ 13,577   $ 13,111   $ 12,418
   Financial, Professional & International Insurance      3,546      3,275      3,408
   Personal Insurance                                     7,534      7,923      8,061


   Total                                               $ 24,657   $ 24,309   $ 23,887

                                                            Net Written Premiums
   (for the year ended December 31, in millions)         2013       2012       2011
   Business Insurance                                  $ 12,233   $ 11,872   $ 11,340
   Financial, Professional & International Insurance      3,309      2,981      3,102
   Personal Insurance                                     7,225      7,594      7,745


   Total                                               $ 22,767   $ 22,447   $ 22,187

Gross and net written premiums in 2013 both increased by 1% over 2012. Gross and net written premiums in 2012 increased by 2% and 1%, respectively, over 2011. Factors contributing to the changes in gross and net written premiums in each segment in 2013 and 2012 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.


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RESULTS OF OPERATIONS BY SEGMENT

Business Insurance

    Results of the Company's Business Insurance segment were as follows:

     (for the year ended December 31, in millions)     2013       2012       2011
     Revenues:
. . .
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