The Travelers Companies Inc. Reports Operating Results (10-Q)

Author's Avatar
Apr 30, 2009
The Travelers Companies Inc. (TRV, Financial) filed Quarterly Report for the period ended 2009-03-31.

St. Paul Travelers is a leading provider of commercial property-liability insurance and asset management services. Under the Travelers brand the company is also a leading underwriter of homeowners and auto insurance through independent agents. The Travelers Companies Inc. has a market cap of $24.91 billion; its shares were traded at around $42.56 with a P/E ratio of 8.1 and P/S ratio of 1. The dividend yield of The Travelers Companies Inc. stocks is 2.9%. The Travelers Companies Inc. had an annual average earning growth of 55% over the past 5 years.

Highlight of Business Operations:

Net income of $662 million in the first quarter of 2009 declined $305 million, or 32%, from net income of $967 million in the same period of 2008, reflecting a decline in net investment income, an increase in net realized investment losses, a reduction in net favorable prior year reserve development, and reduced underwriting margins related to pricing and loss cost trends. Net income in the first quarter of 2009 included a benefit of $69 million resulting from the favorable resolution of various prior year federal tax matters. In addition, net income in the first quarter of 2009 benefited from a $61 million reduction in the estimate of property windpool assessments related to Hurricane Ike that had been recorded in general and administrative expenses in the third quarter of 2008. Catastrophe losses in the first quarters of 2009 and 2008 totaled $83 million and $95 million, respectively.

Net investment income of $542 million in the first quarter of 2009 declined $273 million, or 33%, from the same period of 2008, primarily due to negative returns from non-fixed maturity investments in 2009, compared with positive returns in 2008. Non-fixed maturity investments produced negative net investment income of $175 million in the first quarter of 2009, compared with net investment income of $39 million in the same period of 2008. Included in non-fixed maturity investments are private equity partnerships, hedge funds and real estate partnerships that are accounted for under the equity method of accounting and typically report financial statement information on a lag. The decline in net investment income from these investments in 2009 reflected the challenging capital market conditions that have persisted in recent months. Net investment income from the Companys fixed maturity portfolio in the first quarter of 2009 also declined when compared with the same period of 2008, primarily due to a significant decline in short-term interest rates and a lower average level of long-term fixed maturity invested assets. The amortized cost of the fixed maturity portfolio at March 31, 2009 totaled $61.77 billion, $2.03 billion lower than at the same date in 2008, primarily reflecting the impact of $1.12 billion of common share repurchases during the preceding twelve-month period, the sale of the Companys subsidiary Unionamerica in December 2008 and the Companys $450 million contribution to its pension plan in the second half of 2008. The average pretax investment yield of 3.0% in the first quarter of 2009 declined from 4.4% in the same period of 2008, primarily reflecting the negative investment income from non-fixed maturity investments in 2009.

Net realized investment losses in the first quarter of 2009 totaled $214 million, compared with net realized investment losses of $62 million in the same period of 2008. The 2009 and 2008 totals included $184 million and $38 million, respectively, of impairment losses. Impairments in the fixed maturity portfolio in the first quarter of 2009 totaled $107 million, which included $51 million of impairments related to structured mortgage securities, $47 million related to various issuers deteriorated financial position and $9 million related to externally managed securities with respect to which the Company does not have the ability to assert an intention to hold until recovery in market value. Impairments in the first quarter of 2009 also included $74 million related to equity investments and $3 million related to other investments. The majority of equity impairments were related to issuers in the financial industry. Also in the first quarter of 2009, the Company incurred $33 million of net realized investment losses related to its holdings of stock purchase warrants of a publicly-held company.

Claims and claim adjustment expenses totaled $3.19 billion in the first quarter of 2009, $169 million, or 6%, higher than the first quarter 2008 total of $3.02 billion. The 2009 total included $258 million of net favorable prior year reserve development and $83 million of catastrophe losses, whereas the 2008 first quarter total included $400 million of net favorable prior year reserve development and $95 million of catastrophe losses. Catastrophe losses in the first quarters of both 2009 and 2008 primarily resulted from several tornadoes and hail storms. Net favorable prior year reserve development in the first quarter of 2009 was concentrated in the Business Insurance segment, resulting from better than expected loss development for recent accident years in the general liability, commercial multi-peril, property and commercial automobile product lines, and in the Personal Insurance segment, primarily due to favorable loss experience related to Hurricanes Katrina and Ike. In the Financial, Professional and International Insurance segment, net favorable prior year reserve development in the professional indemnity and employers liability lines of business in the United Kingdom, the aviation and property lines of business in the Companys operations at Lloyds and the general liability line of business in Canada, were largely offset by reserve strengthening for the professional liability line of business in Ireland.

The amortization of deferred acquisition costs totaled $944 million in the first quarter of 2009, $10 million, or 1%, lower than the comparable 2008 total of $954 million, consistent with the 1% decline in earned premiums. General and administrative expenses totaled $782 million in the first quarter of 2009, a decrease of $71 million, or 8%, from the comparable 2008 total of $853 million. The decrease primarily reflected a $61 million reduction in the estimate of assessments related to Hurricane Ike that had been recorded in general and administrative expenses in the third quarter of 2008 and the impact of foreign currency exchange rates, which were partially offset by continued investments to support business growth and product development. Those investments included the Companys direct to consumer initiative in the Personal Insurance segment.

Operating income of $547 million in the first quarter of 2009 was $136 million, or 20%, lower than operating income of $683 million in the same period of 2008, primarily reflecting significant declines in both net investment income and net favorable prior year reserve development, and reduced underwriting margins related to pricing and loss cost trends. These factors were partially offset by a benefit of $38 million from the favorable resolution of various prior year federal tax matters as well as declines in catastrophe losses and non-catastrophe weather-related losses, and fewer large property losses. In addition, operating income in 2009 benefited from a $26 million reduction in the estimate of property windpool assessments related to Hurricane Ike that had been recorded in general and administrative expenses in the third quarter of 2008. Catastrophe losses in the first quarter of 2009 totaled $12 million, compared with $57 million in the same period of 2008.

Read the The complete ReportTRV is in the portfolios of Richard Snow of Snow Capital Management, L.P., Irving Kahn of Kahn Brothers & Company Inc., Dodge & Cox, Irving Kahn of Kahn Brothers & Company Inc., David Dreman of Dreman Value Management, Brian Rogers of T Rowe Price Equity Income Fund, Brian Rogers of T Rowe Price Equity Income Fund, HOTCHKIS & WILEY of HOTCHKIS & WILEY Capital Management LLC, NWQ Managers of NWQ Investment Management Co, John Keeley of Keeley Fund Management, Kenneth Fisher of Fisher Asset Management, LLC.