Business context and reporting period
The Travelers Companies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The insurer reports Business Insurance, Bond & Specialty Insurance, and Personal Insurance. Comparisons are with the corresponding 2019 periods unless noted.
Financial performance and position
| Metric | Q2 2020 | First six months 2020 |
|---|---|---|
| Premiums | $6.955 billion | $14.184 billion |
| Total revenue | $7.401 billion | $15.309 billion |
| Net income (loss) | $(40) million; diluted EPS $(0.16) | $560 million; diluted EPS $2.19 |
| Combined ratio | 103.7% | 99.5% |
| Net investment income | $268 million | $879 million |
| Net cash from operating activities | $1.66 billion, per company highlights | $2.292 billion |
- Q2 catastrophe losses were $854 million pre-tax ($673 million after tax); first-half losses were $1.19 billion, versus $560 million in 2019. Prior-year reserve development was $2 million favorable in Q2 and $29 million favorable for the half, compared with $123 million and $174 million favorable, respectively, in 2019.
- Underlying underwriting margins improved overall: the underlying combined ratio was 3.5 points lower year over year in Q2 and 2.0 points lower for the first half. However, catastrophe losses and lower prior-year reserve benefits raised the reported combined ratios.
- By segment, Q2 income was a $58 million loss in Business Insurance, $72 million in Bond & Specialty, and $10 million in Personal Insurance. First-half segment income was $231 million, $194 million, and $346 million, respectively.
- Net investment income fell 59% in Q2 and 29% year to date. The company cited lower interest rates and a $234 million Q2 loss from other investments, reflecting market disruption in the first quarter. First-half net realized investment losses were $85 million, versus $78 million of gains in 2019.
- At June 30, total assets were $113.34 billion, investments $80.60 billion, debt $7.05 billion, and shareholders’ equity $26.94 billion. Book value per common share was $106.42. Net unrealized investment gains were $4.63 billion pre-tax ($3.65 billion after tax).
- Debt-to-total capital was 20.7%, or 23.2% excluding after-tax unrealized investment gains, within the company’s stated 15%–25% target range. Holding-company liquidity was $2.02 billion, above its approximately $1.20 billion target. First-half operating cash flow increased from $1.79 billion to $2.29 billion year over year.
Material changes versus the prior comparable period
- Q2 moved from $557 million net income in 2019 to a $40 million net loss in 2020; first-half net income fell 59%, from $1.35 billion to $560 million.
- Premiums were nearly flat in Q2 and up 2% for the first half. COVID-related auto premium refunds and reduced commercial exposures weighed on premium volumes; Bond & Specialty premiums grew.
- Claims and claim adjustment expenses rose 6% in Q2 and 7% for the first half, mainly due to higher catastrophe losses, loss-cost trends, and less favorable prior-year reserve development. Reduced auto claims from fewer miles driven partly offset these pressures.
- Investment portfolio fair-value gains lifted accumulated other comprehensive income: shareholders’ equity rose from $25.94 billion at year-end 2019 to $26.94 billion at June 30, 2020. Total debt increased from $6.56 billion to $7.05 billion.
Outlook, risks and unusual items
- The filing gives no quantified full-year earnings or combined-ratio guidance. Management said COVID-19 effects remain highly uncertain and may continue to pressure premiums and the underwriting expense ratio into 2020 and beyond.
- Management expected after-tax net investment income from the fixed-income portfolio to be approximately $35 million–$40 million lower per quarter for the remainder of 2020 than in the corresponding 2019 quarters, subject to market conditions.
- Following PG&E’s emergence from bankruptcy on July 1, Travelers expected approximately $400 million of favorable prior-year reserve development in Q3 2020, pre-tax and net of expenses and reinsurance, tied to 2017 and 2018 California wildfire subrogation claims.
- COVID-19 risks include further premium declines, claims uncertainty, credit losses, market and investment volatility, possible workers’ compensation presumptions, and possible legislation seeking retroactive business-interruption coverage. The company warned these effects could materially affect results, financial position, or liquidity.
- Gross claims reserves increased $1.26 billion from year-end, partly due to catastrophes, current-year loss-cost trends, and slower claim settlement amid court-system disruptions. Workers’ compensation expansions and inflation may increase claims. Asbestos and environmental reserves totaled $1.83 billion gross; additional liabilities could be material but cannot currently be reasonably estimated.
- Travelers issued $500 million of 2.55% senior notes due 2050, intending to use proceeds to repay $500 million of 3.90% notes due November 2020. It made no share repurchases under its authorization in Q2 and said it may reduce or pause repurchases near term. A $0.85-per-share dividend was declared for payment in September 2020.
Important facts for investors to verify
- Whether catastrophe losses, reserve development, and claim settlement patterns evolve as expected, including the effect of COVID-19 and workers’ compensation policy changes.
- Whether the expected approximately $400 million PG&E-related Q3 benefit is realized, and its final net amount.
- How sustained lower interest rates and private-equity, hedge-fund, and real-estate investment performance affect investment income and realized gains or losses.
- Whether premium volumes, retention, and expense ratios respond as anticipated to economic conditions and premium refunds.
- Whether asbestos/environmental exposures, reinsurance recoverables and credit allowances, and the company’s capital-return plans change materially.