Travelers Companies, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts are in U.S. dollars unless otherwise stated. Travelers operates Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $6.961B | $6.798B | $20.432B | $20.137B |
| Net income | $716M | $928M | $2.071B | $2.573B |
| Diluted EPS | $2.45 | $2.97 | $7.00 | $8.04 |
| Combined ratio | 92.9% | 86.9% | 92.8% | 88.9% |
| Net investment income | $582M | $614M | $1.675B | $1.838B |
Premiums grew 3% in Q3 and 2% year to date. Net income fell 23% in Q3 and 20% for the first nine months; diluted EPS declined 18% and 13%, respectively. Share repurchases reduced average diluted shares to 289.8 million in Q3 from 311.0 million a year earlier, moderating the EPS decline.
Q3 catastrophe losses were $89M, versus $85M a year earlier; favorable prior-year reserve development was $39M, down from $199M. For the first nine months, catastrophe losses were $740M versus $468M, and favorable reserve development was $507M versus $649M. Management cited higher weather losses, loss-cost trends modestly exceeding earned pricing, increased personal-auto bodily-injury loss estimates, and lower reserve releases as key pressures. Investment income also declined, mainly due to lower reinvestment yields and weaker private-equity and real-estate partnership returns.
Segments and underwriting
- Business and International: Q3 operating income was $457M, down 16%; combined ratio was 96.1%, versus 92.2%. Nine-month operating income fell 17% to $1.326B; combined ratio rose to 96.2% from 92.9%. Catastrophe losses and weaker underlying margins weighed on results.
- Bond & Specialty: Q3 operating income was $146M, down 26%, primarily reflecting lower favorable reserve development; combined ratio was 70.1% versus 57.1%. Nine-month operating income increased 4% to $492M, with a 64.0% combined ratio versus 68.8%, helped by higher favorable reserve development.
- Personal: Q3 operating income fell 34% to $158M; combined ratio increased to 92.9% from 85.1%. Nine-month operating income fell 38% to $413M; combined ratio rose to 94.1% from 86.6%. Premiums grew strongly, but higher auto injury estimates, weather losses, and substantially lower favorable reserve development hurt results.
Financial position, cash flow and capital
- At September 30, total assets were $102.787B, investments $72.964B, shareholders’ equity $24.439B, and debt $6.436B. Debt-to-total capital was 20.8%, or 22.3% excluding after-tax unrealized investment gains; the latter was within management’s 15%–25% target range.
- Nine-month operating cash flow was $3.063B, compared with $2.674B in 2015. Investing activities used $1.134B; financing activities used $2.035B. Cash at period-end was $269M.
- Holding-company cash and short-term investments were $1.81B, above the approximately $1.1B liquidity target. A $1.0B credit facility supports the commercial-paper program; $100M of commercial paper was outstanding.
- Share repurchases under authorization totaled $1.65B for the first nine months; $1.68B of authorization remained. Dividends paid were $569M. The quarterly dividend was raised to $0.67 per share, payable December 30, 2016.
- Investments increased 4% from year-end 2015. The fixed-maturity portfolio had an average credit quality of Aa2, with 2.8% below investment grade. Net pre-tax unrealized investment gains on fixed maturities were $2.89B.
Outlook, risks and unusual items
- Management expected competitive insurance markets to continue. It anticipated positive domestic renewal pricing in Business and International, positive but moderating management-liability renewal changes in Bond & Specialty, and positive renewal changes in Personal Auto and Homeowners.
- For the remainder of 2016, management expected Business and International underlying margins to improve versus the same 2015 period, Bond & Specialty margins to remain broadly consistent, and Personal Insurance margins to weaken. The direct-to-consumer business was expected to remain modest in size and unprofitable for a number of years.
- Management estimated lower reinvestment yields could reduce after-tax fixed-income investment income by approximately $20M–$25M per quarter during the remainder of 2016 and into 2017, compared with corresponding quarters of 2015 and 2016. Market volatility adds uncertainty to returns on non-fixed-maturity investments.
- Asbestos and environmental liabilities remain difficult to estimate and could require material future charges. The company increased net asbestos reserves by $225M in Q3; net asbestos reserves were $1.402B at September 30. Net environmental reserves were $394M, including $82M of net reserve strengthening in Q2. Management said adverse developments could exceed current reserves.
- A disputed reinsurance claim totaled $525M, including $238M recoverable already recorded and $287M of interest treated as an unrecognized gain contingency. The case had no trial date. The company also had $1.65B of unfunded investment commitments.
- The company paid $524M in Q2 to settle its PPG asbestos-related obligation. A new $500M, 3.75% senior-note issue due 2046 partly funded repayment of $400M of 6.25% notes at maturity.
- Material risks include catastrophe and non-catastrophe weather losses, reserve adequacy and inflation, investment returns and interest-rate movements, asbestos and environmental litigation, reinsurance collectability, competition, regulation, foreign-exchange exposure, and economic uncertainty.
Important facts for investors to verify
- Whether personal-auto bodily-injury loss estimates and loss-cost trends continue to pressure underlying results, and whether earned pricing catches up.
- Future catastrophe experience and the sustainability of favorable prior-year reserve development, particularly in Personal Insurance.
- Asbestos and environmental reserve development, including the effects of litigation, settlements, and reinsurance recoveries.
- Investment-income sensitivity to low reinvestment yields, market volatility, and changes in interest rates.
- Capital-return plans and liquidity after repurchases, dividends, and any additional debt actions.