Business context and reporting period
The Travelers Companies, Inc. is a property and casualty insurer serving commercial, specialty and personal markets. This Form 10-K covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015; it also presents unaudited fourth-quarter results. Effective April 1, 2017, Travelers realigned its reporting segments to Business Insurance, Bond & Specialty Insurance, and Personal Insurance; prior-period segment data was reclassified.
Financial performance and key metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $28.90 billion | $27.63 billion |
| Net income | $2.06 billion | $3.01 billion |
| Diluted EPS | $7.33 | $10.28 |
| Net earned premiums | $25.68 billion | $24.53 billion |
| Net investment income | $2.40 billion | $2.30 billion |
| Operating cash flow | $3.76 billion | $4.20 billion |
| Combined ratio | 97.9% | 92.0% |
- Fourth-quarter revenue was $7.45 billion and net income was $551 million, versus $7.19 billion and $943 million, respectively, in fourth-quarter 2016.
- 2017 catastrophe losses were $1.95 billion, compared with $877 million in 2016. Net favorable prior-year reserve development was $592 million, down from $771 million.
- Core income was $2.04 billion, compared with $2.97 billion in 2016. The 2017 result excludes net realized investment gains and the tax-law enactment effect under the company’s definition.
- The combined ratio’s loss and LAE component rose to 67.2% from 60.5%; catastrophe losses contributed 7.6 points, while favorable prior-year development reduced the ratio by 2.3 points. The underwriting expense ratio improved to 30.7% from 31.5%.
- Net written premiums rose 5% to $26.22 billion. Personal Insurance grew fastest, with net written premiums up 9%; Business Insurance rose 3% and Bond & Specialty Insurance rose 4%.
- Segment income was $1.61 billion for Business Insurance, $556 million for Bond & Specialty, and $128 million for Personal Insurance. Their combined ratios were 97.8%, 77.4%, and 103.1%, respectively.
- At year-end, total assets were $103.48 billion, total investments $72.50 billion, claims reserves $49.65 billion, shareholders’ equity $23.73 billion, and total debt $6.57 billion. Debt-to-total capitalization was 21.7%, or 22.5% excluding after-tax unrealized investment gains.
- Fixed maturities and short-term securities represented 93% of investments. Fixed maturities had an average credit quality of Aa2; 2.7% were below investment grade. Pre-tax net investment income yield was 3.3%.
- Holding-company liquidity was $1.27 billion, above its approximately $1.1 billion target. Net reinsurance recoverables were $8.31 billion, including $3.11 billion for structured settlements.
Material changes versus the prior comparable period
- Revenue increased about 5%, but net income fell about 32% and diluted EPS fell about 29%. Management attributed the earnings decline mainly to higher catastrophe losses, lower favorable reserve development, weaker underlying underwriting margins, and the absence of a favorable reinsurance-dispute settlement recorded in 2016.
- Catastrophe losses were driven mainly by California wildfires, Hurricanes Harvey, Irma and Maria, and U.S. winter, wind and hail storms. Personal Insurance reported $1.09 billion of catastrophe losses; its combined ratio rose to 103.1% from 95.8%.
- Underlying margins also faced pressure from loss-cost trends modestly exceeding earned pricing in Business Insurance, higher non-catastrophe fire losses in that segment, and higher non-catastrophe weather losses in Personal Insurance.
- Operating cash flow decreased by $440 million, reflecting higher claim payments and other cash uses, partly offset by higher premium collections and lower income-tax payments.
- Total debt increased by $134 million. Travelers issued $700 million of 4.00% senior notes due 2047, redeemed $107 million of junior subordinated debentures, and repaid $450 million of senior notes at maturity.
- Shareholders’ equity increased to $23.73 billion from $23.22 billion. Travelers repurchased 10.9 million shares for $1.38 billion under its authorization and paid $785 million in dividends; declared dividends were $2.83 per share versus $2.62 in 2016.
Outlook, management commentary, risks and unusual items
- For 2018, management expected strong retention by historical standards and positive renewal pricing. It forecast higher Business Insurance underlying margins and modestly lower underlying combined ratios in Business and Personal Insurance, assuming more normalized weather and other loss activity. Bond & Specialty expectations were broadly consistent with 2017 for the first nine months, with improvement anticipated in the fourth quarter.
- Management expected 2018 after-tax investment income from fixed-maturity and short-term portfolios to be about $25 million to $30 million higher per quarter than the corresponding 2017 quarters. It also expected the lower federal corporate tax rate to benefit 2018 results. These are forward-looking expectations, not guarantees.
- The Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21%. Travelers recorded a $129 million net 2017 tax charge, primarily from remeasuring deferred taxes and taxing accumulated foreign earnings. The company also estimated additional tax payments of about $70 million annually for eight years under the transition rule for discounting claims.
- Material risks include severe or multiple catastrophes; uncertainty in catastrophe models and claims reserves; inflation and long-tail claims; asbestos and environmental litigation; reinsurance collectability and availability; investment credit and interest-rate risk; regulatory limits on pricing and subsidiary dividends; competition and technology disruption; and cyber or operational interruptions.
- Net asbestos reserves were $1.28 billion at year-end; net environmental reserves were $360 million. The company increased net asbestos reserves by $225 million and environmental reserves by $65 million in 2017. Management said ultimate exposure remains uncertain and additional liabilities could materially affect future results.
- Simply Business was acquired on August 4, 2017 for approximately $464 million, including repayment of debt and other obligations. The acquired business represented less than 1% of consolidated assets, revenue and net income for 2017; its internal controls were excluded from the year-end controls assessment.
- Auditors KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded controls were effective, subject to the stated Simply Business exclusion.
Most important facts an investor should verify
- Whether catastrophe losses and weather-related claims normalize, and how much earnings remain exposed to major events and reinsurance recoveries.
- Whether underlying pricing keeps pace with loss-cost inflation, particularly in commercial liability and personal auto, and whether Personal Insurance returns below a 100% combined ratio.
- Whether favorable prior-year reserve development persists; review accident-year development and the asbestos and environmental reserve assumptions.
- Whether 2018 investment-income and tax benefits materialize, including the estimated transition-tax cash payments and accounting effects of tax reform.
- Whether holding-company liquidity, debt maturities, subsidiary dividend capacity and capital-return plans remain consistent with ratings and regulatory requirements.
- How Simply Business performs and whether its integration and internal-control review identify material issues.