Travelers Companies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The interim financial statements are unaudited. Travelers is a property-and-casualty insurer reporting Business Insurance, Bond & Specialty Insurance, and Personal Insurance segments.
Financial performance and position
Amounts are in millions except per-share data, percentages, and where otherwise noted.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $7,184 | $6,785 | $14,126 | $13,471 |
| Premiums | $6,351 | $6,067 | $12,534 | $12,048 |
| Net investment income | $598 | $549 | $1,208 | $1,093 |
| Net income | $595 | $664 | $1,212 | $1,355 |
| Diluted EPS | $2.11 | $2.24 | $4.28 | $4.55 |
| Combined ratio | 96.7% | 93.1% | 96.4% | 92.7% |
| Operating cash flow | $810 | Not stated here | $1,585 | $1,293 |
- Q2 net income fell 10% and diluted EPS fell 6% year over year; for the first half, net income fell 11% and diluted EPS fell 6%. Repurchases reduced the per-share declines relative to the net-income declines.
- Q2 catastrophe losses were $403 million ($262 million after tax), versus $333 million a year earlier. First-half catastrophe losses were $750 million versus $651 million.
- Net favorable prior-year reserve development was $203 million in Q2 and $284 million in the first half, compared with $288 million and $468 million, respectively, in 2016.
- Q2 combined ratio worsened 3.6 points; first-half ratio worsened 3.7 points. The first-half loss and loss-adjustment expense ratio increased to 65.5% from 61.1%; the underwriting expense ratio improved to 30.9% from 31.6%.
- By segment, Q2 income was $429 million for Business Insurance, $163 million for Bond & Specialty, and $12 million for Personal Insurance. Personal Insurance’s combined ratio was 104.1%; Bond & Specialty’s was 68.7% and Business Insurance’s was 96.5%.
Balance sheet, debt and capital
- At June 30, total assets were $102.67 billion, investments $72.33 billion, shareholders’ equity $23.86 billion, and debt $6.92 billion. Debt was $6.44 billion at December 31, 2016.
- Debt-to-total-capital was 22.5%, or 23.3% excluding after-tax unrealized investment gains; the latter was within the company’s stated 15%–25% target range. Holding-company liquidity was $2.55 billion, above its approximately $1.1 billion target.
- Six-month financing included $700 million of 4.00% senior notes due 2047; the company redeemed $107 million of 6.25% junior subordinated debentures. No commercial paper was outstanding at quarter-end.
- Shareholders received $389 million in dividends during the first half. The company repurchased $700 million of shares under its authorization; $5.23 billion of authorization capacity remained at June 30. The declared quarterly dividend was $0.72 per share.
- Book value per common share was $86.46. The fixed-maturity portfolio had a weighted average credit quality of Aa2; below-investment-grade holdings were 2.7% of that portfolio.
Material changes and management commentary
- Premiums grew 5% in Q2 and 4% in the first half. Personal Insurance premiums grew fastest, up 10% and 9%, respectively; Business Insurance grew 2% and 1%, and Bond & Specialty grew 3% and 2%.
- Management attributed lower consolidated earnings mainly to lower favorable reserve development, higher catastrophe losses, and weaker underlying underwriting margins. Personal auto bodily-injury loss estimates and ordinary non-catastrophe weather variability pressured results.
- Net investment income increased 9% in Q2 and 11% in the first half. Higher returns from private-equity partnerships more than offset lower fixed-maturity income, which management linked to lower reinvestment rates.
- Results are presented under three realigned segments effective April 1, 2017; prior periods were reclassified to match. The change disaggregated international businesses among the segments.
- Environmental reserves were increased by $65 million in Q2 2017; the comparable 2016 increase was $82 million. At June 30, net environmental reserves were $411 million. Net asbestos reserves were $1.19 billion.
Outlook, risks and unusual items
- The filing provides operating expectations, but no quantified consolidated earnings or EPS guidance. Management expects competitive insurance markets and retention levels to remain strong by historical standards through the remainder of 2017 and into 2018.
- Management expects Business Insurance and Bond & Specialty underlying underwriting margins to be broadly consistent with comparable periods. It expects Personal Insurance margins to improve, including improvement in Agency Automobile, while noting that outcomes depend on loss trends and weather.
- Management estimated lower fixed-income reinvestment yields could reduce after-tax investment income by about $15 million per quarter for the remainder of 2017 and about $10 million per quarter into 2018, compared with corresponding prior-year quarters. Market deterioration could also reduce investment income or cause realized losses.
- The company agreed to acquire U.K. digital small-business insurer Simply Business for approximately $490 million, including repayment of debt and other obligations. Closing was expected in Q3 2017, subject to regulatory approval and customary conditions; funding was to include note proceeds and internal resources.
- Asbestos and environmental claims remain uncertain; the company says additional liabilities beyond reserves could be material, but cannot currently be reasonably estimated. Catastrophes, reserve revisions, inflation, investment-market and interest-rate changes, competition, regulatory or tax changes, foreign exchange, reinsurance collectability, and acquisition execution are also risks.
- Other notable items: first-half income tax expense was reduced by $39 million from resolution of prior-year tax matters. Q2 other revenues included an immaterial gain from settling reinsurance disputes. In May, the company settled remaining disputes in a case with a $31 million reinsurance receivable, which was fully satisfied.
Important facts for investors to verify
- Whether personal-auto bodily-injury loss trends and Personal Insurance’s combined ratio above 100% improve as management expects.
- Whether catastrophe activity, reserve development, and asbestos/environmental exposures lead to further reserve strengthening or earnings volatility.
- Whether investment yields, private-equity returns, and unrealized investment values evolve as assumed, including the stated reinvestment-income headwinds.
- Whether Simply Business closes on the expected terms and timing, and how the acquisition affects liquidity and capital returns.
- Whether the company sustains its dividend and repurchase plans while maintaining capital and ratings targets; repurchases and dividends remain subject to company and market conditions.