Travelers 2013 Annual Report Download - page 107

(i) lower catastrophe losses, (ii) higher underlying underwriting margins, (iii) an increase in other
revenues and (iv) higher net favorable prior year reserve development, partially offset by (v) lower net
investment income. The higher underlying underwriting margins resulted from the impact of earned
pricing that exceeded loss cost trends and lower non-catastrophe weather-related losses. Partially
offsetting this net pretax increase in operating income was the related tax expense. Additionally,
operating income in 2013 benefited from a reduction in income tax expense resulting from the
resolution of prior year tax matters. The effective tax rate in 2013 increased over 2012. This resulted
from 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. Catastrophe losses in 2013 were
$250 million, compared with $1.02 billion in 2012. Net favorable prior year reserve development in
2013 was $209 million, compared with $175 million in 2012.
Operating income in 2012 was $217 million, $549 million higher than the operating loss of ($332)
million in 2011. The improvement in operating income in 2012 compared with 2011 primarily reflected
the pretax impact of (i) a decline in catastrophe losses, (ii) higher underlying underwriting margins and
(iii) an increase in net favorable prior year reserve development. The higher underlying underwriting
margins resulted from lower non-catastrophe weather-related losses and lower fire-related losses.
Partially offsetting this net pretax increase in operating income was the related tax expense.
Additionally, operating income in 2011 benefited from a reduction in income tax expense resulting from
the resolution of prior year tax matters. The effective tax rate in 2012 increased over 2011. This
resulted from 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, as well as the resolution of
prior year tax matters discussed above. Catastrophe losses in 2012 were $1.02 billion, compared with
$1.49 billion in 2011. Net favorable prior year reserve development in 2012 was $175 million, compared
with $110 million in 2011.
Revenues
Earned Premiums
Earned premiums in 2013 were $7.32 billion, $297 million or 4% lower than in 2012. Earned
premiums in 2012 were $7.62 billion, $32 million or less than 1% higher than in 2011. The changes in
both years reflected changes in net written premiums over the preceding twelve months.
Net Investment Income
Net investment income in 2013 was $369 million, $35 million or 9% lower than in 2012. Net
investment income in 2012 was $404 million, $20 million or 5% lower than in 2011. Refer to the ‘‘Net
Investment Income’’ section of ‘‘Consolidated Results of Operations’’ herein for a discussion of the
change in the Company’s net investment income in 2013 and 2012 as compared with the respective
prior year. In addition, refer to note 2 of notes to the Company’s consolidated financial statements
herein for a discussion of the Company’s net investment income allocation methodology.
Other Revenues
Other revenues in 2013 included a $20 million gain from the sale of renewal rights in the third
quarter of 2013 related to the Company’s National Flood Insurance Program (NFIP) business. The
Company was a participant in the NFIP Write Your Own (WYO) Program administered by the Federal
Emergency Management Agency (FEMA) and the Federal Insurance & Mitigation Administration
(FIMA).
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