•Total debt of $6.35 billion, resulting in a debt-to-total capital ratio of 20.0% (22.2% excluding net unrealized investment gains, net of tax)
The National Accounts market in the Business Insurance segment is the primary source of the Company's fee-based business. The $27 million and $9 million increases in fee income in 2012 and 2011, respectively, compared with the respective prior years are described in the Business Insurance segment discussion that follows.
Claims and claim adjustment expenses in 2012 were $7.86 billion, $590 million or 7% lower than in 2011, primarily reflecting (i) a decline in catastrophe losses, (ii) lower non-catastrophe weather-related losses and (iii) an increase in net favorable prior year reserve development, partially offset by (iv) the impact of loss cost trends. 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. 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.
The loss and loss adjustment expense ratio of 73.1% in 2011 was 14.0 points higher than the loss and loss adjustment expense ratio of 59.1% in 2010. Catastrophe losses in 2011 and 2010 accounted for 9.0 points and 4.1 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in 2011 and 2010 provided 2.2 points and 8.4 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2011 underlying loss and loss adjustment expense ratio was 2.9 points higher than the 2010 ratio on the same basis, reflecting the factors discussed above.
Income tax expense in 2012 was $32 million, compared to an income tax benefit of $293 million in 2011. The change in income tax expense of $325 million in 2012 from 2011 primarily reflected the $898 million decrease in underwriting loss (including the favorable impacts of a decrease in catastrophes and an increase in net favorable prior year reserve development) from 2011. The change in income tax expense in 2012 from 2011 was also impacted by the $10 million benefit in 2011 resulting from the favorable resolution of various prior year tax matters.
The Company's fixed maturity investment portfolio at December 31, 2012 and 2011 included $3.00 billion and $3.52 billion, respectively, of residential mortgage-backed securities including pass-through-securities and collateralized mortgage obligations (CMO), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company's investment strategy generally favors securities that reduce this risk within expected
by structured settlements at December 31, 2012 (in millions). Also included is the A.M. Best rating of the Company's predominant insurer from each insurer group at February 19, 2013:
At December 31, 2012, total cash and short-term invested assets aggregating $2.03 billion and having a weighted average maturity of 76 days were held in the United States by the holding company. These assets are sufficient to meet the holding company's current liquidity requirements and are in excess of the Company's minimum target level, comprising the Company's estimated annual pretax interest expense and common shareholder dividends, and currently totaling approximately $1.1 billion. These liquidity requirements primarily include shareholder dividends, debt service and contributions to its qualified domestic pension plan from time to time.
Conversion of Preferred Stock to Common Stock. In May 2011, the Company's board of directors authorized the redemption of the Company's preferred stock held by The Travelers 401(k) Savings Plan (the Savings Plan) and gave notice of that redemption to the appropriate fiduciaries of the Savings Plan. Following a fiduciary review, the Savings Plan exercised its right to convert each preferred share into eight shares of the Company's common stock. As a result, all preferred shares outstanding on June 7, 2011 (190,083 shares) were converted into a total of 1.52 million shares of the Company's common stock.
Shelf Registration. The Company has filed with the Securities and Exchange Commission a universal shelf registration statement for the potential offering and sale of securities to replace the Company's previous registration statement that had expired in the normal course of business. The Company may offer these securities from time to time at prices and on other terms to be determined at the time of offering.
(1)The Company's $107 million remaining aggregate principal amount of 6.25% fixed-to-floating rate debentures bear interest at an annual rate of 6.25% from the date of issuance to, but excluding, March 15, 2017 and at a rate of three-month LIBOR plus 2.215% thereafter. The table above includes interest payments through the scheduled maturity date of March 15, 2037. Interest payments beginning March 15, 2017 through March 15, 2037 were calculated using the three-month LIBOR rate as of December 31, 2012.
(5)Represents estimated timing for fulfilling unfunded commitments for private equity limited partnerships and real estate partnerships.
The Qualified Plan is subject to regulations under the Employee Retirement Income Act of 1974 as amended (ERISA), which requires plans to meet minimum standards of funding and requires such plans to subscribe to plan termination insurance through the Pension Benefit Guaranty Corporation (PBGC). The Company does not have a minimum funding requirement for the Qualified Plan for 2013 and does not anticipate having a minimum funding requirement in 2014. The Company has significant discretion in making contributions above those necessary to satisfy the minimum funding requirements. The Company made discretionary contributions to the Qualified Plan of $217 million, $185 million, and $35 million in 2012, 2011 and 2010, respectively. In determining future contributions, the Company will consider the performance of the plan's investment portfolio, the effects of interest rates on the projected benefit obligation of the plan and the Company's other capital requirements. The Company has not determined whether or not additional discretionary funding will be made in the current year or beyond. However, the Company currently believes, subject to actual plan performance and funded status at the time, that it may make discretionary pension contributions of approximately $75 million to $100 million annually over the next few years.
incremental paid loss development for each future calendar year could result in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.
The Company's change in reserve estimate for this product line was -22% for 2012, -5% for 2011 and -25% for 2010. The 2012 change primarily reflected better than expected development for accident years 2009 through 2011, driven by favorable loss development related to catastrophe losses incurred in 2011, and by higher subrogation and salvage recoveries for accident years 2009 through 2011. The 2011 change primarily reflected better than expected development in the 2008 and 2009 accident years for certain large national property and ocean marine exposures. The 2010 change primarily occurred in the 2008 and 2009 accident years as a result of better than expected loss development in Industry-Focused Underwriting and Target Risk Underwriting.
Workers' compensation is generally considered a long tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year. While certain payments such as initial medical treatment or temporary wage replacement for the injured worker are made quickly, some other payments are made over the course of several years, such as awards for permanent partial injuries. In addition, some payments can run as long as the injured worker's life, such as permanent disability benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are generally short, settlements are generally not complex, and most of the liability can be considered high frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims providing lifetime coverage for medical expense arising from a worker's injury, as such claims are subject to greater inflation risk. Overall, the claim liabilities for this line create a somewhat greater than moderate estimation risk.
compensation reserves represent approximately 34% of the Company's total claims and claim adjustment expense reserves.
Some of the reinsurance agreements that the Company entered into as part of its catastrophe bond programs are dual trigger contracts. All of these contracts meet the requirements to be accounted for as reinsurance in accordance with guidance for accounting for reinsurance contracts. The Company's catastrophe bond programs are described in more detail in "Item 1 - Business-Catastrophe Reinsurance."
(1)Total other-than-temporary impairment (OTTI) gains were $27 million, $30 million and $7 million for the years ended December 31, 2012, 2011 and 2010, respectively. Of total OTTI, credit losses of $(15) million, $(25) million and $(26) million for the years ended December 31, 2012, 2011 and 2010, respectively, were recognized in net realized investment gains. In addition, unrealized gains from other changes in total OTTI of $42 million, $55 million and $33 million for the years ended December 31, 2012, 2011 and 2010, respectively, were recognized in other comprehensive income as part of changes in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.
impairment in value. Impairment is recognized only if the carrying amount of the intangible asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset.
At December 31, 2012 and 2011, the Company's insurance subsidiaries had $4.94 billion and $4.70 billion, respectively, of securities on deposit at financial institutions in certain states pursuant to the respective states' insurance regulatory requirements. Funds deposited with third parties to be used as collateral to secure various liabilities on behalf of insureds, cedants and other creditors had a fair value of $68 million and $90 million at December 31, 2012 and 2011, respectively. Other investments pledged as collateral securing outstanding letters of credit had a fair value of $56 million and $59 million at December 31, 2012 and 2011, respectively.
In 2011, estimated claims and claim adjustment expenses incurred included $842 million of net favorable development for claims arising in prior years, including $715 million of net favorable prior year reserve development impacting the Company's results of operations and $45 million of accretion of discount. Overall, accident years prior to and including 2009 experienced $1.10 billion of net favorable reserve development, while the 2010 accident year experienced $383 million of net unfavorable reserve development.
At December 31, 2012 and 2011, the Company's claims and claim adjustment expense reserves included $2.73 billion and $2.78 billion, respectively, for asbestos and environmental-related claims, net of reinsurance.
of direct actions against the Company, future developments pertaining to the Company's ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.
In December 2011, the Company filed with the Securities and Exchange Commission a universal shelf registration statement for the potential offering and sale of securities to replace the Company's previous registration statement that had expired in the normal course of business. The Company may offer these securities from time to time at prices and on other terms to be determined at the time of offering.
The fair value of restricted stock units, deferred stock units and performance shares is measured at the market price of the Company stock at date of grant.
A summary of restricted stock units, deferred stock units and performance share activity under the Company's 2004 Incentive Plan and legacy plans as of and for the year ended December 31, 2012 is as follows: