Travelers Companies, Inc. — 2015 Form 10-K
Business context and reporting period. Travelers is a property-and-casualty insurer serving commercial, specialty and personal markets. This annual report covers the fiscal year ended December 31, 2015; it also presents selected fourth-quarter results. Unless otherwise noted, financial amounts are in U.S. dollars.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $26.80 billion | $27.16 billion | Down 1% |
| Net income | $3.44 billion | $3.69 billion | Down 7% |
| Diluted EPS | $10.88 | $10.70 | Up 2% |
| Net earned premiums | $23.87 billion | $23.71 billion | Up 1% |
| Net investment income | $2.38 billion | $2.79 billion | Down 15% |
| Operating cash flow | $3.43 billion | $3.69 billion | Down 7% |
| Combined ratio | 88.3% | 89.0% | Improved 0.7 points |
Net income fell mainly because of lower investment income and realized investment gains, reduced other revenue, and slightly weaker underlying underwriting margins. Lower catastrophe losses partly offset these pressures. Share repurchases reduced the share count and helped diluted EPS rise despite lower net income. Favorable prior-year reserve development was $941 million before tax; catastrophe losses were $514 million.
Fourth-quarter revenue was $6.67 billion and net income was $866 million, versus $6.78 billion and $1.04 billion, respectively, in fourth-quarter 2014. Diluted EPS was $2.83, compared with $3.11.
Balance sheet, capital and liquidity
- Total assets were $100.18 billion, down from $103.08 billion; shareholders’ equity was $23.60 billion, down from $24.84 billion.
- Claims and claim-adjustment reserves were $48.30 billion, versus $49.85 billion. Total investments were $70.47 billion, of which fixed maturities and short-term securities made up approximately 93%.
- Total debt was $6.34 billion. Debt-to-total-capital was 21.2%, or 22.1% excluding after-tax unrealized investment gains, within the company’s stated 15%–25% target range. A $400 million, 6.25% senior note matured in June 2016.
- Holding-company cash and short-term invested assets were $1.63 billion at year-end. The company also had a $1.0 billion revolving credit facility, expiring in June 2018; $100 million of its $800 million commercial-paper program was outstanding.
- Operating cash flow was $3.43 billion. Investing activities provided $317 million and financing activities used $3.73 billion, principally reflecting repurchases and dividends.
- Net unrealized investment gains were $1.29 billion after tax, down from $1.97 billion, primarily as interest rates rose. The fixed-maturity portfolio’s average credit quality was Aa2; 2.8% was below investment grade.
Material changes and segment results
- Net written premiums rose 1% to $24.12 billion. Personal Insurance premiums grew, while Business and International and Bond & Specialty premiums were broadly flat to slightly lower.
- Business and International Insurance operating income declined 8% to $2.17 billion; its combined ratio improved to 92.1% from 93.1%. Lower investment income weighed on results, while lower catastrophe losses and greater favorable reserve development helped underwriting.
- Bond & Specialty operating income declined 13% to $633 million, and its combined ratio rose to 67.9% from 60.8%. The comparison was affected by substantially lower favorable prior-year reserve development in 2015.
- Personal Insurance operating income increased 8% to $889 million, and its combined ratio improved to 86.6% from 88.7%. Agency automobile net written premiums rose 8%, supported by Quantum Auto 2.0; homeowners and other premiums declined 1%.
- The company repurchased 29.6 million shares for $3.15 billion under its authorization and paid $739 million in shareholder dividends. Including employee-related share repurchases, total share repurchases were approximately $3.22 billion.
Outlook, risks and unusual items
- For 2016, management expected strong retention overall and positive renewal premium changes, with variation by line. It expected underlying underwriting margins broadly consistent with 2015 in Business and International and Bond & Specialty, but lower in Personal Insurance.
- Management estimated that lower reinvestment yields and a lower level of fixed-maturity investments could reduce after-tax fixed-maturity investment income by approximately $25 million to $30 million per quarter in 2016 versus corresponding 2015 quarters. Returns from non-fixed-maturity investments were uncertain.
- The company expected to continue returning capital not needed for operations. Over time, dividends and share repurchases would generally not exceed operating income; future repurchases remain subject to capital, catastrophe, pension, regulatory and market considerations.
- Asbestos and environmental exposures remain significant and difficult to estimate. Net asbestos reserves were $1.81 billion and net environmental reserves were $361 million at year-end. 2015 reserve reviews added $224 million for asbestos and $72 million for environmental claims.
- A $579 million payment in January 2015 resolved asbestos direct-action litigation; it had been fully accrued at December 31, 2014. The filing also describes a pending reinsurance dispute with Munich Re: the related $238 million recoverable is recorded, while $271 million of accrued interest at year-end is an unrecognized gain contingency.
- Key risks include catastrophe severity and frequency, climate-related uncertainty, reserve-estimation error, reinsurance collectability and availability, investment and interest-rate risk, competition and pricing pressure, regulatory restrictions, and cyber and technology disruption. The company reported that its U.S. and foreign insurance subsidiaries were above applicable risk-based-capital requirements.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- How much of earnings and the 88.3% combined ratio depended on the $941 million of favorable prior-year reserve development, and whether that development persists.
- Whether lower investment yields and weaker alternative-investment returns continue to reduce investment income and book value.
- Developments in asbestos and environmental claims, including reserve adequacy, the PPG-related settlement obligation, and outcomes of coverage litigation.
- Whether 2016 premium and margin expectations are met, particularly in Personal Insurance and in the Agency Auto business as new business grows.
- Reinsurance recoverability and the status of the Munich Re dispute; catastrophe exposure relative to available reinsurance and capital.
- Capital returns, debt refinancing and holding-company liquidity, including the June 2016 note maturity and regulatory limits on subsidiary dividends.