Business context and reporting period
The Travelers Companies, Inc. (NYSE: TRV) filed this unaudited Form 10-Q for the three months ended March 31, 2022. Its reportable segments are Business Insurance, Bond & Specialty Insurance, and Personal Insurance. Unless otherwise noted, financial amounts are in U.S. dollars.
Financial performance and position
- Revenue and premiums: Total revenue was $8.81 billion, up 6% from $8.31 billion. Earned premiums rose 9% to $8.01 billion; net written premiums increased 11% to $8.37 billion.
- Profit: Net income was $1.018 billion versus $733 million, up 39%. Diluted EPS rose to $4.15 from $2.87, also benefiting from a lower average diluted share count. The effective tax rate was 14%, including a $47 million benefit from resolution of prior-year tax matters.
- Investment income and gains: Net investment income declined 9% to $637 million (after-tax $539 million) as weaker returns from private equity partnerships outweighed higher fixed-maturity income. Net realized investment losses were $23 million, versus gains of $44 million a year earlier.
- Underwriting: The combined ratio improved to 91.3% from 96.6%; the loss ratio was 62.3% versus 66.7%, and the underwriting expense ratio was 29.0% versus 29.9%. Catastrophe losses fell to $160 million from $835 million. Net favorable prior-year reserve development was $153 million, down from $317 million. Excluding catastrophes and prior-year development, the underlying combined ratio worsened 1.7 points.
- Segment income: Business Insurance earned $669 million, up from $317 million; Bond & Specialty earned $217 million, up from $137 million; Personal Insurance earned $225 million, down from $314 million. Personal Insurance’s combined ratio increased to 95.3% from 90.3%.
- Cash flow and capital returns: Operating cash flow was $1.27 billion, compared with $1.19 billion. Cash ended the quarter at $752 million. The company repurchased $500 million of shares under authorizations and paid $213 million in dividends; total capital returned, including employee-related share acquisitions, was reported as $773 million. The declared quarterly dividend was $0.88 per share; on April 19, the company announced an increase to $0.93 beginning with the June 2022 payment.
- Balance sheet and liquidity: Total assets were $118.59 billion, down from $120.47 billion at year-end; total investments were $83.66 billion. Debt was $7.29 billion. Debt-to-total capital was 22.2%, or 21.3% excluding after-tax unrealized investment gains and losses. Holding-company liquidity was $1.55 billion, above its approximately $1.22 billion target. Shareholders’ equity fell to $25.53 billion from $28.89 billion, and book value per share was $106.40.
- Investment marks: Higher interest rates drove a $4.83 billion pretax quarterly decline in unrealized investment gains/losses on securities without recognized credit losses. The fixed-maturity portfolio moved from a $3.06 billion pretax unrealized gain at year-end to a $1.77 billion pretax unrealized loss at March 31; the after-tax amount was a $1.39 billion loss. This contributed to a $3.80 billion after-tax other comprehensive loss.
Material changes versus the prior comparable period
Improved earnings and the combined ratio primarily reflected much lower catastrophe losses. Favorable prior-year reserve development also supported results, but was substantially smaller than in Q1 2021. Premium growth was broad-based across segments; Personal Insurance results weakened as claims costs rose, including elevated auto and homeowners severity and comparison with unusually low prior-year auto losses. Excluding catastrophes and reserve development, underwriting performance declined overall, mainly because of Personal Insurance. Investment income and realized investment results were lower year over year.
Outlook, commentary, risks, and unusual items
- Outlook: Management expected retention to remain strong by historical standards and competitive conditions for new business to continue during the rest of 2022. It forecast after-tax net investment income from the fixed-income portfolio of approximately $440 million in Q2, $460 million in Q3, and $480 million in Q4, subject to market disruption. It expected 2022 income from private equity and other partnership investments to be significantly below 2021 levels.
- Claims and pricing risks: Management highlighted inflation, labor shortages, higher used-vehicle and parts costs, supply constraints, and elevated auto and property severity as potential pressures on loss costs and reserves. The tort environment, including increased attorney involvement, also affects combined ratios. Catastrophe losses and reserve development are inherently uncertain; management noted that historically about 40% of annual catastrophe losses occurred in Q2.
- Reserves and contingencies: Gross claims reserves were $57.57 billion at quarter-end. The company reported $2.03 billion of gross asbestos and environmental reserves, including net asbestos reserves of $1.30 billion and net environmental reserves of $351 million. It cautioned that legal, coverage, and reinsurance uncertainties could lead to additional liabilities or material future charges, which it could not reasonably estimate. Unfunded investment commitments were $1.72 billion.
- Other notable items: Q1 included $153 million of net favorable prior-year reserve development and a $47 million consolidated tax benefit from resolving prior-year tax matters. The company said there had been no rating-agency actions since its 2021 annual report filing and no material changes to the previously disclosed risk factors. Management reported disclosure controls were effective as of March 31, 2022.
Important facts for investors to verify
- Whether premium growth and renewal pricing continue to keep pace with loss-cost inflation, particularly in Personal Insurance.
- Underlying combined-ratio trends, catastrophe experience, and the sustainability of favorable reserve development.
- Interest-rate and market effects on investment income, unrealized losses, shareholders’ equity, and capital ratios.
- Developments in asbestos and environmental claims, broader reserve adequacy, and reinsurance recoverability.
- Actual fixed-income investment income versus management’s quarterly outlook, and the pace of buybacks and dividends relative to earnings and capital needs.