Travelers 2013 Annual Report Download - page 104

Claims and claim adjustment expenses in 2012 were $1.31 billion, $173 million or 12% lower than
in 2011, primarily reflecting (i) lower levels of large losses and (ii) the impact of lower volumes of
construction surety insured exposures and intentional underwriting actions as discussed above, partially
offset by (iii) a decline in net favorable prior year reserve development. Net favorable prior year
reserve development in 2012 was $298 million, compared with $360 million in 2011. Factors
contributing to net favorable prior year reserve development are discussed in more detail in note 7 of
notes to the Company’s consolidated financial statements. Catastrophe losses in 2012 were $50 million,
compared with $55 million in 2011.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in 2013 was $623 million, $34 million or 6% higher than
in 2012. The increase in 2013 primarily reflected the impact of the acquisition of Dominion and a
change in business mix. Amortization of deferred acquisition costs in 2012 was $589 million, $14 million
or 2% lower than in 2011. The decrease in 2012 was generally consistent with the decrease in earned
premiums.
General and Administrative Expenses
General and administrative expenses in 2013 were $705 million, $38 million or 6% higher than in
2012. The increase in 2013 primarily reflected the impact of the acquisition of Dominion, including
related legal expenses, and higher employee-related expenses. General and administrative expenses in
2012 were $667 million, $19 million or 3% higher than in 2011. The increase in 2012 primarily reflected
increases in employee- and technology-related costs to enhance operations and support future business
growth.
Income Tax Expense
Income tax expense in 2013 was $245 million, $10 million or 4% lower than in 2012, primarily
reflecting the impact of the $15 million reduction in income tax expense resulting from the resolution
of prior year tax matters, partially offset by the impact of a $23 million increase in underwriting
margins (including the impact of catastrophe losses and net favorable prior year reserve development).
Income tax expense in 2012 was $255 million, $25 million or 11% higher than in 2011, primarily
reflecting the impact of a $14 million benefit in 2011 from the resolution of prior year tax matters and,
to a lesser extent, an increase in underwriting margins in 2012 (including the impact of catastrophe
losses and net favorable prior year reserve development) compared with 2011.
GAAP Combined Ratios
The GAAP combined ratio of 84.3% in 2013 was 0.2 points higher than the GAAP combined ratio
of 84.1% in 2012.
The loss and loss adjustment expense ratio of 43.2% in 2013 was 0.4 points higher than the 2012
ratio of 42.8%. Catastrophe losses in 2013 and 2012 accounted for 1.8 and 1.7 points of the loss and
loss adjustment expense ratio, respectively. Net favorable prior year reserve development provided 9.5
points and 9.8 points of benefit to the loss and loss adjustment expense ratio in 2013 and 2012,
respectively. The 2013 underlying loss and loss adjustment expense ratio was level with the 2012 ratio
on the same basis, reflecting the improvement in underlying underwriting margins discussed in the
‘‘Overview’’ section above, offset by the impact of the acquisition of Dominion and an increase in what
the Company defines as large losses. Historically, Dominion has had a higher loss and loss adjustment
expense ratio than the pre-existing business in the Financial, Professional & International Insurance
segment.
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