Travelers 2013 Annual Report Download - page 97

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) 2013 2012 2011
Revenues:
Earned premiums .......................... $12,084 $11,691 $11,327
Net investment income ...................... 1,975 2,090 2,041
Fee income .............................. 393 322 295
Other revenues ........................... 158 40 31
Total revenues .......................... $14,610 $14,143 $13,694
Total claims and expenses ..................... $11,541 $11,761 $12,206
Operating income ........................... $ 2,329 $ 1,843 $ 1,354
Loss and loss adjustment expense ratio ............ 61.2% 65.9% 73.1%
Underwriting expense ratio .................... 30.7 31.5 31.6
GAAP combined ratio ..................... 91.9% 97.4% 104.7%
Overview
Operating income in 2013 was $2.33 billion, $486 million or 26% higher than operating income of
$1.84 billion in 2012. The increase in operating income primarily reflected the pretax impact of
(i) lower catastrophe losses, (ii) higher underlying underwriting margins and (iii) the settlement of a
legal matter, partially offset by (iv) lower net favorable prior year reserve development and (v) lower
net investment income. The improvement in underlying underwriting margins primarily resulted from
the impact of earned pricing that exceeded loss cost trends. 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 was higher than in 2012. This resulted from the impact of 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, partially offset by the resolution of prior year tax matters described
above. Catastrophe losses in 2013 were $285 million, compared with $794 million in 2012. Net favorable
prior year reserve development in 2013 was $325 million, compared with $467 million in 2012. Net
favorable prior year reserve development in 2013 was reduced by a $42 million charge that was
precipitated by legislation in New York as described in the consolidated ‘‘Claims and Claim Adjustment
Expenses’’ section above.
Operating income in 2012 was $1.84 billion, $489 million or 36% higher than operating income of
$1.35 billion in 2011. The increase in operating income primarily reflected the pretax impact of
(i) higher underlying underwriting margins, (ii) a decline in catastrophe losses, (iii) an increase in net
favorable prior year reserve development and (iv) an increase in net investment income. The
improvement in underlying underwriting margins primarily resulted from the impact of earned pricing
that exceeded loss cost trends, lower non-catastrophe weather-related losses and higher business
volume. Partially offsetting this pretax increase was the related tax expense. Additionally, net income in
2011 benefited from a reduction in income tax expense resulting from the resolution of various prior
year tax matters. The effective tax rate in 2012 was higher than in 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, and the resolution of prior year tax matters discussed
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