Travelers 2005 Annual Report Download - page 80

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than in 2003. The catastrophe losses in 2004 were primarily driven by four hurricanes that struck the
southeastern United States in the third quarter.
Revenues
Earned Premiums
The $1.30 billion increase in earned premiums in 2005 over 2004 primarily reflected the impact of the
merger, which was partially offset by a significant decline in earned premiums in the Commercial segment’s
runoff operations, where business is intentionally beingnon-renewed, and a decline in Commercial’s
ongoing operations due to a lower level of net writtenpremium volume in the last half of 2004 and first
half of 2005. Earned premiums in 2005 were reduced by $121 million of reinstatement premiums related to
catastrophe losses, which are described in more detail in the “Cost of Catastrophe” section of this
discussion. Earned premiums in2004 were reduced by $76 million of reinstatement premiums primarily
related to reserve charges recorded in the Surety operation. Partially offsetting these factors were the
impacts of new business growth and increased retention in many of the Company’s insurance operations in
2005. In 2004, the $6.49 billion growth in earned premiums over 2003 was primarily due to the merger, as
well as the earned premium effect of rate increases on renewal business over the previous 12 months and
strong customer retention levels throughout a majority of the markets served by the Company’s insurance
operations.
Net Investment Income
Net investment income of $3.17 billion in 2005 grew $502 million, or 19%, over 2004, reflecting the
impact of the merger, as well as an increase in invested assets over the last twelve months, higher short-
term interest rates and a decline in investment expenses. The increase in invested assets in 2005 was driven
by continued strong operational cash flows and the investment of the $2.40 billion in proceeds from the
divestiture of the Company’s equity interest in Nuveen Investments. The average pretax investment yield in
2005 of 4.7% declined slightly from 4.8% in 2004, due to the maturity of higher yielding bonds and a higher
proportion of tax-exempt investments. Net investment income in 2004 included $111 million from the
initial public offering of one investment.
Net investment income in 2004 increased $794 million over 2003, largely due to the increase in
invested assets resulting from the merger. In addition, strong operational cash flows in2004 contributed to
the growth in invested assets. The average pretax investment yield in 2004 of 4.8% declined from 5.3% in
2003, due to a higher proportion of tax-exempt investments and lower yields on fixed income securities and
alternative investments. In addition, SPC’s investment portfolio acquired in the merger was recorded at its
fair value as of the merger date in accordance with purchase accounting, which reduced the Company’s
reported average investment yield in 2004.
The Company allocates invested assets and the related net investment income to its identified
business segments. Pretax net investment income is allocated based upon an investable funds concept,
which takes into account liabilities (net of non-invested assets) and appropriate capital considerations for
each segment. The investment yield for investable funds reflects the duration of the loss reserves’ future
cash flows, the interest rate environment at the time the losses were incurred and A+ rated corporate debt
instruments.This duration yield is compared to the average portfolio yield and a new average yield is
determined. It is this average yield that is used in the calculation of net investment income on investable
funds.
Fee Income
Fee income in 2005 declined 6% when compared with 2004, as the National Accounts market, the
primary source of the Company’s fee-based business, experienced increased competition, particularly in