Travelers 2012 Annual Report Download - page 92

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) 2012 2011 2010
Revenues:
Earned premiums .......................... $11,691 $11,327 $10,766
Net investment income ...................... 2,090 2,041 2,156
Fee income .............................. 322 295 285
Other revenues ........................... 40 31 28
Total revenues .......................... $14,143 $13,694 $13,235
Total claims and expenses ..................... $11,761 $12,206 $10,157
Operating income ........................... $ 1,843 $ 1,354 $ 2,301
Loss and loss adjustment expense ratio ............ 65.9% 73.1% 59.1%
Underwriting expense ratio .................... 31.5 31.6 32.2
GAAP combined ratio ..................... 97.4% 104.7% 91.3%
Overview
Operating income in 2012 was $1.84 billion, $489 million or 36% higher than operating income of
$1.35 billion in 2011. The improvement in operating income in 2012 compared with 2011 primarily
reflected the pretax impact of (i) higher underlying underwriting margins primarily resulting from
earned pricing that exceeded loss cost trends, lower non-catastrophe weather-related losses and higher
business volume, (ii) a decline in catastrophe losses, (iii) an increase in net favorable prior year reserve
development and (iv) an increase in net investment income. Partially offsetting these pretax
improvements were their related tax expense. The effective tax rate in 2012 increased from the prior
year due to 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. Operating income in 2011
included a $76 million benefit resulting from the favorable resolution of various prior year tax matters.
Catastrophe losses in 2012 were $794 million, compared with $1.02 billion in 2011. Net favorable prior
year reserve development in 2012 was $467 million, compared with $245 million in 2011.
Operating income in 2011 was $1.35 billion, $947 million or 41% lower than in 2010. The decline
in operating income in 2011 compared with 2010 primarily reflected the pretax impact of (i) lower net
favorable prior year reserve development, (ii) a significant increase in catastrophe losses, (iii) lower
underlying underwriting margins related to earned pricing and loss cost trends, partially offset by higher
business volume, and (iv) lower net investment income. Partially offsetting these net pretax declines
were their related net tax benefit. The effective tax rate in 2011 decreased from the prior year due to
interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate
of 35%, comprising a higher percentage of pretax income. These factors were partially offset by the
$76 million benefit resulting from the favorable resolution of various prior year tax matters. Net
favorable prior year reserve development was $245 million in 2011, compared with $901 million in
2010. Catastrophe losses in 2011 were $1.02 billion, compared with $437 million in 2010.
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