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Section 1: 8-K (8-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported):  October 20, 2016

 

The Travelers Companies, Inc.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

001-10898

 

41-0518860

(State or other jurisdiction of
incorporation)

 

(Commission File Number)

 

(IRS Employer Identification
Number)

 

485 Lexington Avenue
New York, New York

 

10017

(Address of principal executive offices)

 

(Zip Code)

 

(917) 778-6000

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 



 

Item 2.02.  Results of Operations and Financial Condition.

 

On October 20, 2016, The Travelers Companies, Inc. (the “Company”) issued a press release announcing the results of the Company’s operations for the quarter ended September 30, 2016, and the availability of the Company’s third quarter financial supplement on the Company’s web site.  The press release and the financial supplement are furnished as Exhibits 99.1 and 99.2 to this Report and are hereby incorporated by reference in this Item 2.02.

 

As provided in General Instruction B.2 of Form 8-K, the information and exhibits contained in this Form 8-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.

 

Item 9.01.  Financial Statements and Exhibits.

 

(d)                                 Exhibits.

 

Exhibit No.

 

Description

99.1

 

Press Release, dated October 20, 2016, reporting results of operations (This exhibit is furnished and not filed.)

99.2

 

Third Quarter 2016 Financial Supplement of The Travelers Companies, Inc. (This exhibit is furnished and not filed.)

 

2



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date:       October 20, 2016

THE TRAVELERS COMPANIES, INC.

 

 

 

 

By:

/s/ Kenneth F. Spence III

 

 

Name:

Kenneth F. Spence III

 

 

Title:

Executive Vice President and General Counsel

 

3



 

EXHIBIT INDEX

 

Exhibit No.

 

Description

99.1

 

Press Release, dated October 20, 2016, reporting results of operations (This exhibit is furnished and not filed.)

99.2

 

Third Quarter 2016 Financial Supplement of The Travelers Companies, Inc. (This exhibit is furnished and not filed.)

 

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(Back To Top)

Section 2: EX-99.1 (EX-99.1)

Exhibit 99.1

 

 

NYSE: TRV

 

Travelers Reports Third Quarter Net and Operating Income per Diluted Share of $2.45 and $2.40, Respectively

 

Return on Equity and Operating Return on Equity of 11.6% and 12.5%, Respectively

 

·             Net and operating income of $716 million and $701 million, respectively, declined from the prior year quarter, primarily due to lower net favorable prior year reserve development and higher non-catastrophe weather-related losses.

·             Strong consolidated underwriting results, as reflected in combined ratio of 92.9% and underlying combined ratio of 92.1%.

·             Record net written premiums of $6.389 billion, up 3% from prior year quarter.

·             Total capital returned to shareholders of $755 million in the quarter, including $562 million of share repurchases. Year-to-date total capital returned to shareholders of $2.292 billion, including $1.721 billion of share repurchases.

·             Book value per share of $86.04 increased 9% from end of prior year quarter and 8% from year-end 2015. Adjusted book value per share of $78.82 increased 6% and 5%, respectively, from the same dates.

·             Board of Directors declared quarterly dividend per share of $0.67.

 

New York, October 20, 2016 — The Travelers Companies, Inc. today reported net income of $716 million, or $2.45 per diluted share, for the quarter ended September 30, 2016, compared to $928 million, or $2.97 per diluted share, in the prior year quarter. Operating income in the current quarter was $701 million, or $2.40 per diluted share, compared to $918 million, or $2.93 per diluted share, in the prior year quarter. These declines were primarily driven by lower net favorable prior year reserve development and higher non-catastrophe weather-related losses. Per diluted share amounts benefited from the impact of share repurchases.

 

Consolidated Highlights

 

($ in millions, except for per share amounts, and after-tax,

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

except for premiums & revenues)

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

Net written premiums

 

$

6,389

 

$

6,191

 

3

%

$

18,900

 

$

18,257

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

6,961

 

$

6,798

 

2

 

$

20,432

 

$

20,137

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

716

 

$

928

 

(23

)

$

2,071

 

$

2,573

 

(20

)

per diluted share

 

$

2.45

 

$

2.97

 

(18

)

$

7.00

 

$

8.04

 

(13

)

Operating income

 

$

701

 

$

918

 

(24

)

$

2,048

 

$

2,551

 

(20

)

per diluted share

 

$

2.40

 

$

2.93

 

(18

)

$

6.92

 

$

7.97

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

289.8

 

311.0

 

(7

)

293.6

 

317.7

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

92.9

%

86.9

%

6.0

pts

92.8

%

88.9

%

3.9

pts

Underlying combined ratio

 

92.1

%

88.8

%

3.3

pts

91.5

%

89.9

%

1.6

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on equity

 

11.6

%

15.4

%

(3.8)

pts

11.4

%

14.0

%

(2.6)

pts

Operating return on equity

 

12.5

%

16.2

%

(3.7)

pts

12.2

%

14.9

%

(2.7)

pts

 

 

 

 

 

 

 

 

 

Change from

 

 

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

 

 

2016

 

2015

 

2015

 

2015

 

2015

 

Book value per share

 

$

86.04

 

$

79.75

 

$

79.00

 

8

%

9

%

Adjusted book value per share

 

78.82

 

75.39

 

74.35

 

5

 

6

 

 

See Glossary of Financial Measures for definitions and the statistical supplement for additional financial data.

 

1



 

“We were pleased with our third quarter operating income of $701 million and operating return on equity of 12.5%, which brings our year-to-date operating return on equity to 12.2%,” commented Alan Schnitzer, Chief Executive Officer. “Underwriting results for the quarter reflected lower net favorable prior year reserve development, higher non-catastrophe weather-related losses and higher-than-expected losses associated with auto bodily injury but nonetheless remained strong as reflected in our 92.9% combined ratio. While returns from our high-quality fixed income portfolio declined in line with our expectations due to the continued low interest rate environment, returns from our non-fixed income portfolio improved from recent quarters and were comparable to the prior year quarter. In terms of capital management, we returned $755 million of excess capital to shareholders, including $562 million of share repurchases. Year to date, we have returned nearly $2.3 billion to shareholders, including over $1.7 billion in share repurchases.

 

“We are encouraged that the markets in which we operate continue to remain stable. In our commercial businesses, we are pleased with our historically high levels of retention and positive renewal premium change. Once again, these results were due to the successful execution of our strategy to retain those accounts that meet our return thresholds and to take appropriate measures to improve profitability on those accounts that do not, while also seeking attractive new business opportunities. In Personal Insurance, growth in auto, driven by the success of our Quantum Auto 2.0 product, and in homeowners, which benefited from our ability to offer a compelling account solution to our customers and agents, resulted in record net written premiums of over $2.2 billion for the quarter. While we experienced a somewhat higher-than-expected level of bodily injury claim severity across our auto product portfolio, we believe this was attributable to environmental factors and was not product-specific. Accordingly, we continue to believe that growth from Quantum Auto 2.0 is adding meaningful economic value, and the product remains positioned to generate appropriate returns over time.

 

“Our results this quarter and year to date reflect our continued focus on delivering superior returns. We are confident that our competitive advantages and ability to execute on our marketplace strategies, together with our balance sheet strength and active capital management strategy, will continue to enable us to invest in our businesses while delivering industry-leading returns over time.”

 

Consolidated Results

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

($ in millions and pre-tax, unless noted otherwise)

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting gain:

 

$

408

 

$

759

 

$

(351

)

$

1,224

 

$

1,890

 

$

(666

)

Underwriting gain includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

39

 

199

 

(160

)

507

 

649

 

(142

)

Catastrophes, net of reinsurance

 

(89

)

(85

)

(4

)

(740

)

(468

)

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

582

 

614

 

(32

)

1,675

 

1,838

 

(163

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), including interest expense

 

(66

)

(81

)

15

 

(181

)

(232

)

51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income before income taxes

 

924

 

1,292

 

(368

)

2,718

 

3,496

 

(778

)

Income tax expense

 

223

 

374

 

(151

)

670

 

945

 

(275

)

Operating income

 

701

 

918

 

(217

)

2,048

 

2,551

 

(503

)

Net realized investment gains after income taxes

 

15

 

10

 

5

 

23

 

22

 

1

 

Net Income

 

$

716

 

$

928

 

$

(212

)

$

2,071

 

$

2,573

 

$

(502

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

92.9

%

86.9

%

6.0

pts

92.8

%

88.9

%

3.9

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on combined ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

(0.6

)

(3.3

)

2.7

pts

(2.8

)

(3.6

)

0.8

pts

Catastrophes, net of reinsurance

 

1.4

 

1.4

 

pts

4.1

 

2.6

 

1.5

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying combined ratio

 

92.1

%

88.8

%

3.3

pts

91.5

%

89.9

%

1.6

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

Business and International Insurance

 

$

3,583

 

$

3,590

 

%

$

11,177

 

$

11,066

 

1

%

Bond & Specialty Insurance

 

566

 

565

 

 

1,594

 

1,577

 

1

 

Personal Insurance

 

2,240

 

2,036

 

10

 

6,129

 

5,614

 

9

 

Total

 

$

6,389

 

$

6,191

 

3

%

$

18,900

 

$

18,257

 

4

%

 

2



 

Third Quarter 2016 Results

(All comparisons vs. third quarter 2015, unless noted otherwise)

 

Net income of $716 million after-tax and operating income of $701 million after-tax decreased $212 million and $217 million, respectively, primarily due to lower net favorable prior year reserve development and higher non-catastrophe weather-related losses.

 

Underwriting results

 

·                  The combined ratio remained strong at 92.9%. It increased 6.0 points due to a higher underlying combined ratio (3.3 points) and lower net favorable prior year reserve development (2.7 points).

 

·                  The underlying combined ratio of 92.1% increased 3.3 points, primarily driven by higher non-catastrophe weather-related losses, higher loss estimates in the personal automobile product line for bodily injury liability coverages, including the re-estimation of losses incurred in the first six months of 2016 and the impact of loss cost trends that modestly exceeded earned pricing in the Business and International Insurance segment, as expected, partially offset by lower levels of what the Company defines as large losses.

 

·                  Net favorable prior year reserve development in Business and International Insurance and Bond & Specialty Insurance of $60 million pre-tax was partially offset by net unfavorable prior year reserve development in Personal Insurance of $21 million pre-tax. Catastrophe losses in the third quarter of 2016 primarily resulted from hail storms in the Western region of the United States and flooding in the Southeast region of the United States.

 

Net investment income of $582 million pre-tax ($472 million after-tax) decreased due to lower returns in the fixed income portfolio, while returns in the non-fixed income portfolio were comparable to the prior year quarter and improved from recent periods. Fixed income returns declined in line with our expectations due to lower reinvestment rates available in the market.

 

Record net written premiums of $6.389 billion increased 3% driven by growth in Personal Insurance.

 

Year-to-Date 2016 Results

(All comparisons vs. year-to-date 2015, unless noted otherwise)

 

Net income of $2.071 billion after-tax and operating income of $2.048 billion after-tax decreased $502 million and $503 million, respectively, primarily driven by higher catastrophe losses, a lower underlying underwriting gain (i.e., excluding net favorable prior year reserve development and catastrophe losses), lower net investment income and lower net favorable prior year reserve development in the Personal Insurance segment.

 

Underwriting results

 

·                  The combined ratio remained strong at 92.8%. It increased 3.9 points due to a higher underlying combined ratio (1.6 points), higher catastrophe losses (1.5 points) and lower net favorable prior year reserve development (0.8 points).

 

·                  The underlying combined ratio of 91.5% increased 1.6 points, primarily driven by higher non-catastrophe weather-related losses, as expected, the impact of loss cost trends that modestly exceeded earned pricing in the Business and International Insurance segment, as expected, and higher loss estimates in the personal automobile product line for bodily injury liability coverages, partially offset by lower levels of what the Company defines as large losses.

 

·                  Net favorable prior year reserve development occurred in all segments. Catastrophe losses included the third quarter events discussed above, as well as wind and hail storms in several regions of the United States and wildfires in Canada in the second quarter of 2016 and wind and hail storms in Texas and several other regions of the United States and winter storms in the eastern United States in the first quarter of 2016.

 

Net investment income of $1.675 billion pre-tax ($1.353 billion after-tax) decreased due to lower returns in both the fixed income and non-fixed income portfolios. Fixed income returns declined due to the lower reinvestment rates available in

 

3



 

the market. Non-fixed income returns, which remained positive, declined due to lower private equity and real estate partnership returns.

 

Other income/(expense) included proceeds from the favorable settlement of a claims-related legal matter in the first quarter of 2016.

 

Record net written premiums of $18.900 billion increased 4% driven by growth in Personal Insurance.

 

Shareholders’ Equity

 

Shareholders’ equity of $24.439 billion increased 4% from year-end 2015, primarily due to an increase in after-tax net unrealized investment gains. After-tax net unrealized investment gains were $2.049 billion ($3.135 billion pre-tax), compared to $1.289 billion after-tax ($1.974 billion pre-tax) at year-end 2015. Book value per share of $86.04 and adjusted book value per share of $78.82 increased 8% and 5%, respectively, from year-end 2015.

 

The Company repurchased 4.8 million shares during the third quarter at an average price of $117.28 per share for a total cost of $562 million. Capacity remaining under the existing share repurchase authorization was $1.684 billion at the end of the quarter. At the end of third quarter 2016, statutory capital and surplus was $20.609 billion and the ratio of debt-to-capital was 20.8%. The ratio of debt-to-capital excluding after-tax net unrealized investment gains was 22.3%, well within the Company’s target range of 15% to 25%.

 

The Board of Directors today declared a quarterly dividend of $0.67 per share. This dividend is payable on December 30, 2016, to shareholders of record as of the close of business on December 9, 2016.

 

Business and International Insurance Segment Financial Results

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

($ in millions and pre-tax, unless noted otherwise)

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting gain:

 

$

128

 

$

272

 

$

(144

)

$

377

 

$

730

 

$

(353

)

Underwriting gain includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

19

 

49

 

(30

)

250

 

229

 

21

 

Catastrophes, net of reinsurance

 

(72

)

(39

)

(33

)

(432

)

(246

)

(186

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

445

 

471

 

(26

)

1,280

 

1,412

 

(132

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

10

 

5

 

5

 

51

 

18

 

33

 

Operating income before income taxes

 

583

 

748

 

(165

)

1,708

 

2,160

 

(452

)

Income tax expense

 

126

 

202

 

(76

)

382

 

556

 

(174

)

Operating income

 

$

457

 

$

546

 

$

(89

)

$

1,326

 

$

1,604

 

$

(278

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

96.1

%

92.2

%

3.9

pts

96.2

%

92.9

%

3.3

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on combined ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

(0.5

)

(1.4

)

0.9

pts

(2.3

)

(2.1

)

(0.2

)pts

Catastrophes, net of reinsurance

 

1.9

 

1.1

 

0.8

pts

4.0

 

2.2

 

1.8

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying combined ratio

 

94.7

%

92.5

%

2.2

pts

94.5

%

92.8

%

1.7

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums by market

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

 

 

 

 

 

 

Select Accounts

 

$

657

 

$

654

 

%

$

2,090

 

$

2,085

 

%

Middle Market

 

1,616

 

1,597

 

1

 

4,939

 

4,774

 

3

 

National Accounts

 

245

 

254

 

(4

)

799

 

781

 

2

 

First Party

 

399

 

411

 

(3

)

1,223

 

1,203

 

2

 

Specialized Distribution

 

263

 

277

 

(5

)

851

 

845

 

1

 

Total Domestic

 

3,180

 

3,193

 

 

9,902

 

9,688

 

2

 

International

 

403

 

397

 

2

 

1,275

 

1,378

 

(7

)

Total

 

$

3,583

 

$

3,590

 

%

$

11,177

 

$

11,066

 

1

%

 

4



 

Third Quarter 2016 Results

(All comparisons vs. third quarter 2015, unless noted otherwise)

 

Operating income for Business and International Insurance was $457 million after-tax, a decrease of $89 million, primarily due to a lower underlying underwriting gain, higher catastrophe losses and lower net favorable prior year reserve development.

 

Underwriting results

 

·                  The combined ratio of 96.1% increased 3.9 points due to a higher underlying combined ratio (2.2 points), lower net favorable prior year reserve development (0.9 points) and higher catastrophe losses (0.8 points).

 

·                  The underlying combined ratio of 94.7% increased 2.2 points, primarily driven by higher non-catastrophe weather-related losses, the impact of loss cost trends that modestly exceeded earned pricing, as expected, and a modestly higher expense ratio, partially offset by lower levels of what the Company defines as large losses.

 

·                  Net favorable prior year reserve development primarily resulted from better than expected loss experience in the Company’s domestic operations in (i) the general liability product line for both primary and excess coverages for accident years 2006 and prior as well as accident years 2014 and 2015 (excluding an increase to asbestos reserves discussed below), (ii) the workers’ compensation product line for accident years 2006 and prior as well as accident year 2015 and (iii) the commercial auto product line for accident years 2011 and prior, partially offset by (iv) a $225 million increase to asbestos reserves.

 

·                  The asbestos reserve strengthening, which resulted from the Company’s annual in-depth asbestos claim review that was completed in the third quarter, was driven by increases in the Company’s estimate for projected settlement and defense costs related to a broad number of policyholders. The increase in the estimate of projected settlement and defense costs resulted from recent payment trends that continue to be higher than previously anticipated. While the overall view of the underlying asbestos environment is essentially unchanged from recent periods, there remains a high degree of uncertainty with respect to future exposure to asbestos claims.

 

Net written premiums of $3.583 billion were comparable with the prior year quarter.

 

Year-to-Date 2016 Results

(All comparisons vs. year-to-date 2015, unless noted otherwise)

 

Operating income for Business and International Insurance was $1.326 billion after-tax, a decrease of $278 million, primarily driven by higher catastrophe losses, a lower underlying underwriting gain and lower net investment income, partially offset by higher other income and higher net favorable prior year reserve development. The prior year period also included a $12 million tax benefit.

 

Underwriting results

 

·                  The combined ratio of 96.2% increased 3.3 points due to higher catastrophe losses (1.8 points) and a higher underlying combined ratio (1.7 points), partially offset by higher net favorable prior year reserve development (0.2 points).

 

·                  The underlying combined ratio of 94.5% increased 1.7 points, primarily driven by the impact of loss cost trends that modestly exceeded earned pricing, as expected, higher non-catastrophe weather-related losses and a modestly higher expense ratio, partially offset by lower levels of what the Company defines as large losses.

 

·                  Net favorable prior year reserve development primarily resulted from better than expected loss experience in the Company’s domestic operations in (i) the workers’ compensation product line for accident years 2006 and prior as well as accident year 2015 and (ii) the general liability product line, related to both primary and excess coverages for accident years 2006 and prior as well as accident years 2011, 2013 and 2015 (excluding an increase to asbestos and environmental reserves discussed below) and (iii) the commercial automobile product line for accident years 2011 and prior, as well as in the Company’s international operations in Europe and Canada.

 

5



 

These factors contributing to net favorable prior year reserve development were partially offset by a $225 million increase to asbestos reserves and by an $82 million increase to environmental reserves.

 

Other income included proceeds from the favorable settlement of a claims-related legal matter in the first quarter of 2016.

 

Net written premiums of $11.177 billion increased 1% driven by continued high retention rates, positive renewal premium changes and an increase in new business volume in domestic Business Insurance.

 

Bond & Specialty Insurance Segment Financial Results

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

($ in millions and pre-tax, unless noted otherwise)

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting gain:

 

$

156

 

$

229

 

$

(73

)

$

554

 

$

483

 

$

71

 

Underwriting gain includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

41

 

103

 

(62

)

251

 

178

 

73

 

Catastrophes, net of reinsurance

 

(1

)

(1

)

 

(5

)

(3

)

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

53

 

56

 

(3

)

156

 

169

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

4

 

4

 

 

13

 

14

 

(1

)

Operating income before income taxes

 

213

 

289

 

(76

)

723

 

666

 

57

 

Income tax expense

 

67

 

93

 

(26

)

231

 

195

 

36

 

Operating income

 

$

146

 

$

196

 

$

(50

)

$

492

 

$

471

 

$

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

70.1

%

57.1

%

13.0

pts

64.0

%

68.8

%

(4.8

)pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on combined ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable prior year reserve development

 

(7.5

)pts

(19.1

)pts

11.6

pts

(16.1

)pts

(11.4

)pts

(4.7

)pts

Catastrophes, net of reinsurance

 

0.2

pts

0.1

pts

0.1

pts

0.3

pts

0.2

pts

0.1

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying combined ratio

 

77.4

%

76.1

%

1.3

pts

79.8

%

80.0

%

(0.2

)pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

Management Liability

 

$

354

 

$

350

 

1

%

$

1,010

 

$

993

 

2

%

Surety

 

212

 

215

 

(1

)

584

 

584

 

 

Total

 

$

566

 

$

565

 

%

$

1,594

 

$

1,577

 

1

%

 

Third Quarter 2016 Results

(All comparisons vs. third quarter 2015, unless noted otherwise)

 

Operating income for Bond & Specialty Insurance was $146 million after-tax, a decrease of $50 million, primarily driven by lower net favorable prior year reserve development.

 

Underwriting results

 

·                  The combined ratio of 70.1% increased 13.0 points due to lower net favorable prior year reserve development (11.6 points), a higher underlying combined ratio (1.3 points) and higher catastrophe losses (0.1 points).

 

·                  The underlying combined ratio was strong at 77.4%.

 

·                  Net favorable prior year reserve development resulted from better than expected loss experience in the fidelity and surety product line for accident years 2009 through 2015.

 

Net written premiums of $566 million were comparable to the prior year quarter.

 

6



 

Year-to-Date 2016 Results

(All comparisons vs. year-to-date 2015, unless noted otherwise)

 

Operating income for Bond & Specialty Insurance was $492 million after-tax, an increase of $21 million, primarily driven by higher net favorable prior year reserve development, partially offset by lower net investment income. The prior year period also included a $16 million tax benefit.

 

Underwriting results

 

·                  The combined ratio of 64.0% improved 4.8 points due to higher net favorable prior year reserve development (4.7 points) and a lower underlying combined ratio (0.2 points), partially offset by higher catastrophe losses (0.1 points).

 

·                  The underlying combined ratio was strong at 79.8%.

 

·                  Net favorable prior year reserve development primarily resulted from better than expected loss experience in (i) the fidelity and surety product line for accident years 2009 through 2015 and (ii) the general liability product line for accident years 2007 through 2011.

 

Net written premiums of $1.594 billion increased 1%, primarily driven by continued high retention rates, positive renewal premium changes and an increase in new business volume in Management Liability.

 

Personal Insurance Segment Financial Results

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

($ in millions and pre-tax, unless noted otherwise)

 

2016

 

2015

 

Change

 

2016

 

2015

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting gain:

 

$

124

 

$

258

 

$

(134

)

$

293

 

$

677

 

$

(384

)

Underwriting gain includes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net favorable/(unfavorable) prior year reserve development

 

(21

)

47

 

(68

)

6

 

242

 

(236

)

Catastrophes, net of reinsurance

 

(16

)

(45

)

29

 

(303

)

(219

)

(84

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

84

 

87

 

(3

)

239

 

257

 

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

14

 

9

 

5

 

42

 

33

 

9

 

Operating income before income taxes

 

222

 

354

 

(132

)

574

 

967

 

(393

)

Income tax expense

 

64

 

113

 

(49

)

161

 

300

 

(139

)

Operating income

 

$

158

 

$

241

 

$

(83

)

$

413

 

$

667

 

$

(254

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio

 

92.9

%

85.1

%

7.8

pts

94.1

%

86.6

%

7.5

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact on combined ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (favorable)/unfavorable prior year reserve development

 

1.1

pts

(2.6

)pts

3.7

pts

(0.1

)pts

(4.5

)pts

4.4

pts

Catastrophes, net of reinsurance

 

0.8

pts

2.5

pts

(1.7

)pts

5.3

pts

4.1

pts

1.2

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underlying combined ratio

 

91.0

%

85.2

%

5.8

pts

88.9

%

87.0

%

1.9

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net written premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Automobile(1)

 

$

1,095

 

$

934

 

17

%

$

3,045

 

$

2,646

 

15

%

Agency Homeowners & Other(1)

 

1,058

 

1,035

 

2

 

2,854

 

2,793

 

2

 

Direct to Consumer

 

87

 

67

 

30

 

230

 

175

 

31

 

Total

 

$

2,240

 

$

2,036

 

10

%

$

6,129

 

$

5,614

 

9

%

     


(1) Represents business sold through agents, brokers and other intermediaries, and excludes direct to consumer.

 

7



 

Third Quarter 2016 Results

(All comparisons vs. third quarter 2015, unless noted otherwise)

 

Operating income for Personal Insurance was $158 million after-tax, a decrease of $83 million, primarily driven by a lower underlying underwriting gain and net unfavorable prior year reserve development compared to net favorable prior year reserve development in the prior year quarter, partially offset by lower catastrophe losses.

 

Underwriting results

 

·                  The combined ratio of 92.9% increased 7.8 points due to a higher underlying combined ratio (5.8 points) and net unfavorable prior year reserve development compared to net favorable prior year reserve development in the prior year quarter (3.7 points), partially offset by lower catastrophe losses (1.7 points).

 

·                  The underlying combined ratio of 91.0% increased 5.8 points, primarily driven by higher non-catastrophe weather-related losses, higher loss estimates in the automobile product line for bodily injury liability coverages, including the re-estimation of losses incurred in the first six months of 2016, and the impact of a significant level of new business in recent years, partially offset by a lower expense ratio.

 

·                  While net unfavorable prior year reserve development primarily resulted from higher than expected loss experience in a modest number of claims in the Homeowners and Other product line for liability coverages for accident years 2013 and 2014, overall these accident years have developed net favorably since inception.

 

Record net written premiums of $2.240 billion increased 10%. Agency Automobile net written premiums grew 17% with an increase in policies in force of 12% from the prior year period, driven by the success of Quantum Auto 2.0. Agency Homeowners & Other net written premiums increased 2% with an increase in policies in force of 3% from the prior year period.

 

Year-to-Date 2016 Results

(All comparisons vs. year-to-date 2015, unless noted otherwise)

 

Operating income for Personal Insurance was $413 million after-tax, a decrease of $254 million, primarily driven by lower net favorable prior year reserve development, higher catastrophe losses and a lower underlying underwriting gain. The prior year period included a $4 million tax benefit.

 

Underwriting results

 

·                  The combined ratio of 94.1% increased 7.5 points due to lower net favorable prior year reserve development (4.4 points), a higher underlying combined ratio (1.9 points) and higher catastrophe losses (1.2 points).

 

·                  The underlying combined ratio remained strong at 88.9% and increased 1.9 points, primarily driven by higher loss estimates in the automobile product line for bodily injury liability coverages, higher non-catastrophe weather-related losses and the impact of a significant level of new business in recent years, partially offset by a lower expense ratio.

 

Record net written premiums of $6.129 billion increased 9% due to the same factors as discussed above for third quarter 2016.

 

Financial Supplement and Conference Call

 

The information in this press release should be read in conjunction with a financial supplement that is available on our website at www.travelers.com. Travelers management will discuss the contents of this release and other relevant topics via webcast at 9 a.m. Eastern (8 a.m. Central) on Thursday, October 20, 2016. Investors can access the call via webcast

 

8



 

at http://investor.travelers.com or by dialing 1-800-732-5617 within the U.S. and 1-212-231-2918 outside the U.S. (use passcode 14788 for both the U.S. and international calls). Prior to the webcast, a slide presentation pertaining to the quarterly earnings will be available on the Company’s website.

 

Following the live event, an audio playback of the webcast and the slide presentation will be available on the same website. An audio playback can also be accessed by phone at 1-800-633-8284 within the U.S. and 1-402-977-9140 outside the U.S. (use reservation 21817065 for both the U.S. and international calls).

 

About Travelers

 

The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $27 billion in 2015. For more information, visit www.travelers.com.

 

Travelers may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material Company information. Financial and other important information regarding the Company is routinely accessible through and posted on our website at http://investor.travelers.com, our Facebook page at https://www.facebook.com/travelers and our Twitter account (@Travelers) at https://twitter.com/travelers. In addition, you may automatically receive email alerts and other information about Travelers when you enroll your email address by visiting the Email Notifications section at http://investor.travelers.com.

 

Travelers is organized into the following reportable business segments:

 

Business and International Insurance — The Business and International Insurance segment offers a broad array of property and casualty insurance and insurance related services to its clients, primarily in the United States and in Canada, as well as in the United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world as a corporate member of Lloyd’s.

 

Bond & Specialty Insurance — The Bond & Specialty Insurance segment provides surety, crime, management and professional liability, and cyber risk coverages and related risk management services to a wide range of primarily domestic customers, utilizing various degrees of financially-based underwriting approaches.

 

Personal Insurance — The Personal Insurance segment writes a broad range of property and casualty insurance covering individuals’ personal risks. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.

 

* * * * *

 

Forward-Looking Statements

 

This press release contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:

 

·                  the Company’s outlook and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, margins, net and operating income, investment income and performance, loss costs, return on equity and expected current returns and combined ratios);

·                  share repurchase plans;

·                  future pension plan contributions;

·                  the sufficiency of the Company’s asbestos and other reserves;

·                  the impact of emerging claims issues as well as other insurance and non-insurance litigation;

·                  the cost and availability of reinsurance coverage;

 

9



 

·                  catastrophe losses;

·                  the impact of investment, economic (including rapid changes in commodity prices, such as a significant decline in oil and gas prices, as well as fluctuations in foreign currency exchange rates) and underwriting market conditions; and

·                  strategic initiatives to improve profitability and competitiveness.

 

The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

 

Some of the factors that could cause actual results to differ include, but are not limited to, the following:

 

·                  catastrophe losses could materially and adversely affect the Company’s results of operations, its financial position and/or liquidity, and could adversely impact the Company’s ratings, the Company’s ability to raise capital and the availability and cost of reinsurance;

 

·                  during or following a period of financial market disruption, economic downturn or prolonged period of slow economic growth, the Company’s business could be materially and adversely affected;

 

·                  if actual claims exceed the Company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, the Company’s financial results could be materially and adversely affected;

 

·                  the Company’s investment portfolio may suffer material realized or unrealized losses. The Company’s investment portfolio may also suffer reduced or low returns, particularly if interest rates remain at historically low levels for a prolonged period of time or decline further as a result of actions taken by central banks (a risk which potentially could be increased by, among other things, the United Kingdom’s expected withdrawal from the European Union);

 

·                  the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;

 

·                  the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;

 

·                  the effects of emerging claim and coverage issues on the Company’s business are uncertain;

 

·                  the intense competition that the Company faces could harm its ability to maintain or increase its business volumes and its profitability;

 

·                  disruptions to the Company’s relationships with its independent agents and brokers could adversely affect the Company;

 

·                  the Company may not be able to collect all amounts due to it from reinsurers and reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all;

 

·                  the Company is exposed to credit risk in certain of its business and investment operations including through the utilization of reinsurance or structured settlements, as well as guarantees or indemnifications from third parties;

 

·                  within the United States, the Company’s businesses are heavily regulated by the states in which it conducts business, including licensing and supervision, and changes in regulation may reduce the Company’s profitability and limit its growth;

 

·                  changes in federal regulation could impose significant burdens on the Company and otherwise adversely impact the Company’s results;

 

·                  a downgrade in the Company’s claims-paying and financial strength ratings could adversely impact the Company’s business volumes, adversely impact the Company’s ability to access the capital markets and increase the Company’s borrowing costs;

 

·                  the inability of the Company’s insurance subsidiaries to pay dividends to the Company’s holding company in sufficient amounts would harm the Company’s ability to meet its obligations, pay future shareholder dividends or make future share repurchases;

 

10



 

·                  the Company’s efforts to develop new products or expand in targeted markets may not be successful and may create enhanced risks;

 

·                  the Company may be adversely affected if its pricing and capital models provide materially different indications than actual results;

 

·                  the Company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology;

 

·                  if the Company experiences difficulties with technology, data and network security, including as a result of cyber attacks, outsourcing relationships, or cloud-based technology, the Company’s ability to conduct its business could be negatively impacted;

 

·                  the Company is also subject to a number of additional risks associated with its business outside the United States, including foreign currency exchange fluctuations and restrictive regulations, as well as the risks and uncertainties associated with the United Kingdom’s expected withdrawal from the European Union;

 

·                  regulatory changes outside of the United States, including in Canada and the European Union, could adversely impact the Company’s results of operations and limit its growth;

 

·                  loss of or significant restrictions on the use of particular types of underwriting criteria, such as credit scoring, or other data or methodologies, in the pricing and underwriting of the Company’s products could reduce the Company’s future profitability;

 

·                  acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;

 

·                  the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;

 

·                  the Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;

 

·                  intellectual property is important to the Company’s business, and the Company may be unable to protect and enforce its own intellectual property or the Company may be subject to claims for infringing the intellectual property of others;

 

·                  changes to existing accounting standards may adversely impact the Company’s reported results;

 

·                  changes in U.S. tax laws or in the tax laws of other jurisdictions in which the Company operates could adversely impact the Company; and

 

·                  the Company’s share repurchase plans depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.

 

Our forward-looking statements speak only as of the date of this press release or as of the date they are made, and we undertake no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 11, 2016, as updated by our periodic filings with the SEC.

 

*****

 

GLOSSARY OF FINANCIAL MEASURES AND RECONCILIATIONS OF NON-GAAP MEASURES TO GAAP MEASURES

 

The following measures are used by the Company’s management to evaluate financial performance against historical results and establish targets on a consolidated basis. In some cases, these measures are considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the consolidated financial

 

11



 

statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. Reconciliations of non-GAAP measures to their most directly comparable GAAP measures also follow.

 

In the opinion of the Company’s management, a discussion of these measures provides investors, financial analysts, rating agencies and other financial statement users with a better understanding of the significant factors that comprise the Company’s periodic results of operations and how management evaluates the Company’s financial performance.  Internally, the Company’s management uses these measures to evaluate performance against historical results, to establish financial targets on a consolidated basis and for other reasons, which are discussed below.

 

Some of these measures exclude net realized investment gains (losses), net of tax, and/or net unrealized investment gains (losses), net of tax, which can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends.

 

Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by the Company’s management.

 

RECONCILIATION OF OPERATING INCOME AND CERTAIN OTHER NON-GAAP MEASURES TO NET INCOME

 

Operating income is net income excluding the after-tax impact of net realized investment gains (losses) and discontinued operations. Management uses operating income to analyze each segment’s performance and as a tool in making business decisions. Financial statement users also consider operating income when analyzing the results and trends of insurance companies. Operating earnings per share is operating income on a per common share basis.

 

Reconciliation of Operating Income less Preferred Dividends to Net Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ in millions, pre-tax)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

924

 

$

1,292

 

$

2,718

 

$

3,496

 

Net realized investment gains

 

23

 

15

 

33

 

35

 

Net income

 

$

947

 

$

1,307

 

$

2,751

 

$

3,531

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ in millions, after-tax)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

701

 

$

918

 

$

2,048

 

$

2,551

 

Net realized investment gains

 

15

 

10

 

23

 

22

 

Net income

 

$

716

 

$

928

 

$

2,071

 

$

2,573

 

 

12



 

 

 

Twelve Months Ended December 31,

 

($ in millions, after-tax)

 

2015

 

2014

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income, less preferred dividends

 

$

3,437

 

$

3,641

 

$

3,567

 

$

2,441

 

$

1,389

 

$

3,040

 

$

3,597

 

$

3,191

 

$

4,496

 

$

4,195

 

$

2,020

 

Preferred dividends

 

 

 

 

 

1

 

3

 

3

 

4

 

4

 

5

 

6

 

Operating income

 

3,437

 

3,641

 

3,567

 

2,441

 

1,390

 

3,043

 

3,600

 

3,195

 

4,500

 

4,200

 

2,026

 

Net realized investment gains/(losses)

 

2

 

51

 

106

 

32

 

36

 

173

 

22

 

(271

)

101

 

8

 

35

 

Income from continuing operations

 

3,439

 

3,692

 

3,673

 

2,473

 

1,426

 

3,216

 

3,622

 

2,924

 

4,601

 

4,208

 

2,061

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(439

)

Net income

 

$

3,439

 

$

3,692

 

$

3,673

 

$

2,473

 

$

1,426

 

$

3,216

 

$

3,622

 

$

2,924

 

$

4,601

 

$

4,208

 

$

1,622

 

 

Reconciliation of Operating Earnings per Share to Net Income per Share on a Basic and Diluted Basis

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Operating income

 

$

2.43

 

$

2.96

 

$

7.01

 

$

8.06

 

Net realized investment gains

 

0.05

 

0.04

 

0.08

 

0.07

 

Net income

 

$

2.48

 

$

3.00

 

$

7.09

 

$

8.13

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

Operating income

 

$

2.40

 

$

2.93

 

$

6.92

 

$

7.97

 

Net realized investment gains

 

0.05

 

0.04

 

0.08

 

0.07

 

Net income

 

$

2.45

 

$

2.97

 

$

7.00

 

$

8.04

 

 

Reconciliation of Operating Income by Segment to Total Operating Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ in millions, after-tax)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Business and International Insurance

 

$

457

 

$

546

 

$

1,326

 

$

1,604

 

Bond & Specialty Insurance

 

146

 

196

 

492

 

471

 

Personal Insurance

 

158

 

241

 

413

 

667

 

Total segment operating income

 

761

 

983

 

2,231

 

2,742

 

Interest Expense and Other

 

(60

)

(65

)

(183

)

(191

)

Total operating income

 

$

701

 

$

918

 

$

2,048

 

$

2,551

 

 

RECONCILIATION OF ADJUSTED SHAREHOLDERS’ EQUITY TO SHAREHOLDERS’ EQUITY AND OPERATING RETURN ON EQUITY TO RETURN ON EQUITY

 

Adjusted shareholders’ equity is shareholders’ equity excluding net unrealized investment gains (losses), net of tax, net realized investment gains (losses), net of tax, for the period presented, preferred stock and discontinued operations.

 

13



 

Reconciliation of Adjusted Shareholders’ Equity to Shareholders’ Equity

 

 

 

As of September 30,

 

($ in millions)

 

2016

 

2015

 

 

 

 

 

 

 

Adjusted shareholders’ equity

 

$

22,367

 

$

22,597

 

Net unrealized investment gains, net of tax

 

2,049

 

1,414

 

Net realized investment gains, net of tax

 

23

 

22

 

Shareholders’ equity

 

$

24,439

 

$

24,033

 

 

 

 

As of December 31,

 

($ in millions)

 

2015

 

2014

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted shareholders’ equity

 

$

22,307

 

$

22,819

 

$

23,368

 

$

22,270

 

$

21,570

 

$

23,375

 

$

25,458

 

$

25,647

 

$

25,783

 

$

24,545

 

$

22,227

 

Net unrealized investment gains/(losses), net of tax

 

1,289

 

1,966

 

1,322

 

3,103

 

2,871

 

1,859

 

1,856

 

(146

)

620

 

453

 

327

 

Net realized investment gains/(losses), net of tax

 

2

 

51

 

106

 

32

 

36

 

173

 

22

 

(271

)

101

 

8

 

35

 

Preferred stock

 

 

 

 

 

 

68

 

79

 

89

 

112

 

129

 

153

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

(439

)

Shareholders’ equity

 

$

23,598

 

$

24,836

 

$

24,796

 

$

25,405

 

$

24,477

 

$

25,475

 

$

27,415

 

$

25,319

 

$

26,616

 

$

25,135

 

$

22,303

 

 

Return on equity is the ratio of annualized net income less preferred dividends to average shareholders’ equity for the periods presented. Operating return on equity is the ratio of annualized operating income less preferred dividends to adjusted average shareholders’ equity for the periods presented. In the opinion of the Company’s management, these are important indicators of how well management creates value for its shareholders through its operating activities and its capital management.

 

Average shareholders’ equity is (a) the sum of total shareholders’ equity excluding preferred stock at the beginning and end of each of the quarters for the period presented divided by (b) the number of quarters in the period presented times two.

 

Adjusted average shareholders’ equity is (a) the sum of adjusted shareholders’ equity at the beginning and end of each of the quarters for the period presented divided by (b) the number of quarters in the period presented times two.

 

Calculation of Operating Return on Equity and Return on Equity

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ in millions, after-tax)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Annualized operating income

 

$

2,802

 

$

3,671

 

$

2,730

 

$

3,401

 

Adjusted average shareholders’ equity

 

22,373

 

22,676

 

22,373

 

22,750

 

Operating return on equity

 

12.5

%

16.2

%

12.2

%

14.9

%

 

 

 

 

 

 

 

 

 

 

Annualized net income

 

$

2,863

 

$

3,715

 

$

2,761

 

$

3,431

 

Average shareholders’ equity

 

24,576

 

24,077

 

24,300

 

24,467

 

Return on equity

 

11.6

%

15.4

%

11.4

%

14.0

%

 

Average annual operating return on equity over a period is the ratio of:

 

a) the sum of operating income less preferred dividends for the periods presented to

 

b) the sum of: 1) the sum of the adjusted average shareholders’ equity for all full years in the period presented, and 2) for partial years in the period presented, the number of quarters in that partial year divided by four, multiplied by the adjusted average shareholders’ equity of the partial year.

 

14



 

Calculation of Average Annual Operating Return on Equity from January 1, 2005 through September 30, 2016

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Twelve Months Ended December 31,

 

($ in millions)

 

2016

 

2015

 

2015

 

2014

 

2013

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income, less preferred dividends

 

$

2,048

 

$

2,551

 

$

3,437

 

$

3,641

 

$

3,567

 

$

2,441

 

$

1,389

 

$

3,040

 

$

3,597

 

$

3,191

 

$

4,496

 

$

4,195

 

$

2,020

 

Annualized operating income

 

2,730

 

3,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted average shareholders’ equity

 

22,373

 

22,750

 

22,681

 

23,447

 

23,004

 

22,158

 

22,806

 

24,285

 

25,777

 

25,668

 

25,350

 

23,381

 

21,118

 

Operating return on equity

 

12.2

%

14.9

%

15.2

%

15.5

%

15.5

%

11.0

%

6.1

%

12.5

%

14.0

%

12.4

%

17.7

%

17.9

%

9.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average annual operating return on equity for the period Jan. 1, 2005 through September 30, 2016

 

 

 

 

 

13.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RECONCILIATION OF PRE-TAX UNDERWRITING GAIN EXCLUDING CERTAIN ITEMS TO NET INCOME

 

Underwriting gain is net earned premiums and fee income less claims and claim adjustment expenses and insurance-related expenses. In the opinion of the Company’s management, it is important to measure the profitability of each segment excluding the results of investing activities, which are managed separately from the insurance business. This measure is used to assess each segment’s business performance and as a tool in making business decisions.  Pre-tax underwriting gain, excluding the impact of catastrophes and net favorable prior year loss reserve development, is the underwriting gain adjusted to exclude claims and claim adjustment expenses, reinstatement premiums and assessments related to catastrophes and loss reserve development related to time periods prior to the current year. In the opinion of the Company’s management, this measure is meaningful to users of the financial statements to understand the Company’s periodic earnings and the variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophes and loss reserve development. This measure is also referred to as underlying underwriting margin or underlying underwriting gain.

 

A catastrophe is a severe loss, resulting from natural and man-made events, including risks such as fire, earthquake, windstorm, explosion, terrorism and other similar events. Each catastrophe has unique characteristics and catastrophes are not predictable as to timing or amount. Their effects are included in net and operating income and claims and claim adjustment expense reserves upon occurrence. A catastrophe may result in the payment of reinsurance reinstatement premiums and assessments from various pools. In the opinion of the Company’s management, a discussion of the impact of catastrophes is meaningful to users of the financial statements to understand the Company’s periodic earnings and the variability in periodic earnings caused by the unpredictable nature of catastrophes.

 

Net favorable (unfavorable) prior year loss reserve development is the increase or decrease in incurred claims and claim adjustment expenses as a result of the re-estimation of claims and claim adjustment expense reserves at successive valuation dates for a given group of claims, which may be related to one or more prior years. In the opinion of the Company’s management, a discussion of loss reserve development is meaningful to users of the financial statements as it allows them to assess the impact between prior and current year development on incurred claims and claim adjustment expenses, net and operating income (loss), and changes in claims and claim adjustment expense reserve levels from period to period.

 

15



 

Reconciliation of Pre-tax Underwriting Gain (Excluding the Impact of Catastrophes and Net Favorable Prior Year Loss Reserve Development) to Net Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ in millions, after-tax except as noted)

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Pre-tax underwriting gain excluding the impact of catastrophes and net favorable prior year loss reserve development

 

$

458

 

$

645

 

$

1,457

 

$

1,709

 

Pre-tax impact of catastrophes

 

(89

)

(85

)

(740

)

(468

)

Pre-tax impact of net favorable prior year loss reserve development

 

39

 

199

 

507

 

649

 

Pre-tax underwriting gain

 

408

 

759

 

1,224

 

1,890