Travelers P/C Q2 Net Income Rose 33%

Travelers Property Casualty Corp. reported net income for the second quarter of $441.2 million or $0.44 per share, basic and diluted, compared to net income of $332.0 million or $0.33 per share in the prior year quarter.

The results reflect strong underwriting performance, a lower charge for prior year reserve development, and net realized investment gains versus net losses in the 2002 quarter, offset in part by higher weather-related catastrophe losses. Weighted average shares and common stock equivalents outstanding were 1.008 billion in the current quarter compared to 1.000 billion in the 2002 quarter.

“Our outstanding results this quarter demonstrate the earnings power of the company even in the face of unusual catastrophe events,” said Robert Lipp, chairman and CEO. “Strong underwriting results drove our earnings growth and are reflected in our 17.4 percent return on equity for the current quarter. Net written premiums continue to benefit from higher levels of new business in targeted markets, historically high customer retention rates, and renewal price increases that continue to outpace loss cost trends across all business lines.

“We continue to support a legislative solution to the asbestos litigation crisis that ensures fair treatment for all parties, particularly for truly sick individuals exposed to asbestos,” said Lipp. “Unfortunately, the likely cost of the current Senate bill is unacceptably high, and it leaves open the door to further litigation. Nevertheless, we will continue to press for a solution that is fair and balanced.

“Our competitive position remains excellent, and we continue to believe that full year net and operating income will be in the range of $1.65 billion to $1.75 billion.” This estimate is based on various assumptions, including no further net charges for prior year reserve development, no asbestos incurrals, and, for the remainder of the year, a normal level of catastrophe losses and no significant net realized investment gains or losses.

Consolidated operating income for the quarter increased 21% to $430.8 million compared to $356.8 million in the prior year quarter. The principal difference between net and operating income in the current and prior year quarter is the inclusion in net income of realized investment gains and losses. Another major difference between net and operating income is the cumulative effect of changes in accounting principles, for which there were none in the current or prior year quarter.

The consolidated underwriting gain component of operating income, before catastrophes and prior year reserve development, increased $86.4 million or 92 percent to $180.2 million, after tax, primarily due to the favorable rate environment. Several severe storms resulted in weather-related catastrophe losses of $72.1 million, net of reinsurance and after tax, compared to $14.3 million in the prior year quarter.

Catastrophe losses in the quarter resulted from hail and ice storms in New York, Texas and several Midwestern states in April, followed in May by tornados and hailstorms in a number of southern and Midwestern states. Travelers had previously announced a preliminary estimate of $78.0 million for current quarter catastrophe losses, net of reinsurance and after tax. Operating income also benefited from a lower level of charges for prior year reserve development as compared to the 2002 quarter.

Net investment income, after tax, of $345.3 million was comparable to the prior year quarter. Lower average yields on fixed income securities and lower returns on alternative investments, which resulted in a 50 basis point reduction in the portfolio’s average after tax yield to 3.9 percent, were offset by the benefit of higher average invested assets resulting from strong operating cash flows.

Commercial Lines net written premiums, excluding business written in our Northland and Associates subsidiaries, increased $187.7 million or 12 percent due to higher rates, growth in targeted new business and strong retention across all major business lines.

Net written premiums for Northland and Associates, which were acquired in the fourth quarter of 2001, decreased by $151.2 million or 50 percent. The prior year quarter included an additional $115.0 million of net written premiums due to the termination of certain reinsurance contracts by Northland. In addition, a reassessment in 2002 of the Northland and Associates businesses also contributed to the decrease.

Personal Lines net written premiums increased $137.3 million or 12 percent due to higher rates as well as increased business volumes.

The 4.1 point improvement in the consolidated GAAP combined ratio to 91.0 percent, before catastrophes and prior year reserve development, reflects improvement in the loss and LAE ratio partially offset by a slight increase in the underwriting expense ratio. The improvement in the loss and LAE ratio was primarily due to the favorable rate environment. The increase in the other underwriting expense ratio included the impact of higher contingent commissions resulting from improved underwriting results. The consolidated GAAP combined ratio also reflects the negative impact of higher catastrophe losses partially offset by lower charges for prior year reserve development.

Commercial Lines results in the current quarter include a charge of $33.3 million related to prior year reserve development, after tax and reinsurance, as compared to $52.2 million in the prior year quarter. There were no asbestos incurrals in the current quarter compared to $33.3 million in the 2002 quarter. Total net asbestos paid losses were $116.5 million for the quarter, an increase of $18.7 million over the second quarter of 2002 and a decrease of $73.2 million from the first quarter of 2003, primarily due to the timing of payments subject to settlement agreements. Net asbestos reserves were $3.111 billion as of June 30, 2003.

Other Commercial Lines charges resulting from prior year reserve development in the current quarter primarily relate to a $30.0 million addition to the allowance for uncollectible reinsurance recoverables, or $19.5 million after tax, and a $14.0 million increase in unallocated loss adjustment expenses, or $9.1 million after tax.

Partially offsetting these charges was a benefit of $24.4 million, after tax and reinsurance, related to favorable prior year reserve development in Personal Lines homeowners and auto businesses compared to a net charge of $2.6 million in the prior year quarter.

For the six months ended June 30, 2003, net income was $781.2 million, or $0.78 per share, basic and diluted, compared to net income of $434.1 million, or $0.48 per share for the prior year period. Net income for the prior year period included a cumulative charge of $242.6 million, after tax, or $0.27 per share, resulting from a change in accounting principle relating to goodwill.

Commercial Lines operating income increased $41.5 million or 13% to $352.0 million. The underwriting gain, before catastrophes and prior year reserve development, increased $45.7 million or 52% to $134.2 million primarily due to the favorable rate environment. Catastrophe losses were $27.3 million in the current quarter compared to none in the prior year quarter, and net investment income was comparable with the prior year quarter. See also Prior Year Reserve Development above.

Commercial Lines net written premiums, excluding Northland and Associates, increased $187.7 million or 12 percent due to higher rates, growth in targeted new business and strong retention across all major lines of business. Commercial Lines net written premiums from Northland and Associates decreased $151.2 million or 50 percent as described above.

Core
In National Accounts, which provides loss-sensitive insurance products to large corporations and fee-based services to self-insured corporations and state-sponsored workers’ compensation residual market pools, net written premiums of $192.8 million were comparable to the prior year quarter. Written fees rose 24 percent from $117.7 million in the prior year quarter to $145.4 million. National Accounts continued to benefit from rate increases, higher new business levels and higher business volumes in residual market pools.

In Commercial Accounts, which primarily serves mid-sized businesses, net written premiums, excluding Northland and Associates, increased 19 percent to $729.3 million due to higher rates, growth in targeted new business and strong retention. Renewal price changes increased 11 percent, as compared to 24 percent in the 2002 quarter and 16 percent in the first quarter of 2003. The lower level of renewal price changes resulted mostly from moderation in rates for property coverages. Net written premiums for Northland and Associates decreased 50 percent to $148.3 million as described above.

In Select Accounts, which serves small businesses, net written premiums increased 9 percent to $517.4 million primarily due to renewal price change increases that averaged 14 percent, compared to 18 percent in the prior year quarter and level with the first quarter of 2003, strong retention and an increase in new business.
Specialty

In Bond, which provides surety bonds and executive liability insurance for small and mid-sized accounts, net written premiums increased 29 percent to $205.9 million. This increase reflects the favorable rate environment and strong new business, principally in executive liability products.

In Gulf, which provides a broad range of management and professional liability coverages and excess and surplus lines of insurance, net written premiums decreased 9 percent to $164.3 million, as significant rate increases, especially for directors’ and officers’ liability insurance and other professional liability products, were more than offset by Gulf’s decision in 2002 to exit non-core businesses, including assumed reinsurance, transportation, residual value and property.

The 3.4 point improvement to 89.1 percent in the Commercial Lines GAAP combined ratio, before catastrophes and prior year reserve development, reflects an improvement in the loss and LAE ratio partially offset by an increase in the underwriting expense ratio. The improvement in the loss and LAE ratio resulted from the favorable rate environment while the other underwriting expense ratio increased due to higher contingent commissions that resulted from improved underwriting results.

Weather-related catastrophes, of which there were none in the prior year quarter, increased the combined ratio by 2.2 points while prior year reserve development increased the combined ratio by 2.7 points in the current quarter as compared to 4.7 points in the prior year quarter. See also Prior Year Reserve Development above.

Personal Lines operating income increased 53 percent to $106.8 million compared to $70.0 million in the prior year quarter. The underwriting gain, before catastrophes and prior year reserve development, increased $40.7 million to $46.0 million primarily due to the favorable rate environment. Catastrophe losses of $44.8 million were $30.5 million higher in the current quarter than in the prior year quarter. See also Prior Year Reserve Development above.

Net written premiums increased $137.3 million, or 12 percent, over the prior year quarter, due to rate increases and higher business volumes in both the Automobile and the Homeowners and other lines of business.

Automobile net written premiums increased 9 percent to $777.7 million. Renewal price change increases averaged 6 percent, two points below the second quarter of 2002 and one point below first quarter 2003. Retention levels rose one point from the prior year quarter to 81 percent.

Homeowners and other net written premiums increased 16 percent to $533.6 million. Renewal price change increases averaged 10 percent compared to 16 percent in the second quarter 2002 and 13 percent in the first quarter 2003. The higher level of renewal price change increases in the prior quarters is mostly attributable to rate increases in Texas. Retention rose one point from the prior year quarter to 81 percent. Production through our independent agents, which represented 82 percent of net written premiums, was up 12 percent to $1.075 billion. Production through other channels, which include affinity and joint marketing arrangements, was up 11 percent to $236.2 million.

The 5.4 point improvement to 93.9 percent in the Personal Lines GAAP combined ratio, before catastrophes and prior year reserve development, reflects improvements in both the loss and LAE ratio and the other underwriting expense ratio. These improvements were due to the favorable rate environment and continuing reductions in non-catastrophe property claim frequency.

Weather-related catastrophes increased the combined ratio by 5.8 points, as compared to 2.1 points in the prior year quarter, while favorable prior year reserve development lowered the combined ratio by 3.1 points, as compared to an increase of 0.4 points in the prior year quarter.