Travelers Companies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results are compared with Q1 2019; balance-sheet comparisons are with December 31, 2019. Travelers is a property-casualty insurer operating through Business Insurance, Bond & Specialty Insurance, and Personal Insurance.
Financial results and position
- Revenue and premiums: Total revenue was $7.91 billion, up 3% from $7.67 billion. Earned premiums were $7.23 billion, up 5%; net written premiums rose 4% to $7.35 billion.
- Earnings: Net income was $600 million, down 25% from $796 million. Diluted EPS was $2.33, down from $2.99. The decline reflected investment losses, higher catastrophe losses, and less favorable prior-year reserve development, partly offset by higher underlying underwriting margins and net investment income.
- Underwriting: The combined ratio was 95.5%, versus 93.7% a year earlier; below 100% indicates an underwriting profit. Catastrophe losses were $333 million, or 4.6 points of the ratio. Net favorable prior-year reserve development was $27 million, versus $51 million. The underlying combined ratio, excluding catastrophe losses and prior-year development, improved 0.3 points year over year.
- Segments: Business Insurance income fell 30% to $289 million and its combined ratio worsened to 102.2% from 98.1%. Bond & Specialty income fell 12% to $122 million; combined ratio rose to 85.9% from 81.1%. Personal Insurance income rose 21% to $336 million; combined ratio improved to 88.2% from 90.1%.
- Investments: Net investment income was $611 million, up 5%. Net realized investment losses were $98 million, compared with $53 million of gains in Q1 2019, primarily due to equity-market declines. Total investments were $76.65 billion; fixed maturities and short-term securities made up 94%. The fixed-maturity portfolio had $2.27 billion of pre-tax unrealized gains at quarter-end.
- Cash flow and liquidity: Operating cash flow was $628 million, compared with $639 million. Cash was $544 million. Holding-company liquidity was $1.61 billion, above the stated $1.20 billion target. Total assets were $109.44 billion; shareholders’ equity was $25.20 billion, down from $25.94 billion at year-end.
- Debt and capital: Debt was $6.56 billion, essentially unchanged. Debt-to-total capitalization was 20.6%, or 21.9% excluding after-tax net unrealized investment gains, within the company’s 15%–25% target range. Book value per share was $99.69.
- Shareholder returns: Travelers repurchased 3.5 million shares under its authorization for $425 million and paid $210 million in dividends. The quarterly dividend was $0.82 per share; on April 21, the company announced an increase to $0.85 payable June 30.
Material changes and notable items
- COVID-19 and related economic conditions produced $86 million of pre-tax underwriting charges in Q1, including lower estimated audit premiums, higher premium-receivable credit allowances, and modestly higher claims in certain lines.
- COVID-related market disruption contributed to investment losses and a substantial decline in accumulated other comprehensive income, which moved from $640 million at year-end to a $49 million loss at March 31. Foreign-currency translation also reduced comprehensive income.
- Travelers adopted the expected-credit-loss standard (CECL) in Q1. The adoption reduced opening retained earnings by $43 million after tax and increased the allowance for estimated uncollectible reinsurance.
- Environmental reserves increased by $17 million in Q1. The company had $1.21 billion of net asbestos reserves and $323 million of net environmental reserves at March 31.
Outlook, risks and contingencies
- Management said COVID-19’s effects were highly uncertain and that Q1 was not indicative of the expected impact for the rest of 2020. It expected lower premium volumes, with a more significant impact in Q2 and potentially beyond, and a near-term increase in the underwriting expense ratio. It did not provide outlook for renewal premium changes, underlying underwriting margins, or underlying combined ratios.
- For the remainder of 2020, management expected after-tax net investment income from the fixed-income portfolio to be about $20 million lower per quarter than in the corresponding 2019 quarters. It expected significantly negative Q2 net investment income from private equity and real estate partnerships, whose results are reported with a lag.
- The company may reduce or suspend share repurchases in the near term. It reported no material Q1 liquidity impact from COVID-19, but identified potential effects on cash flows, claims, receivables, investments, capital, and liquidity.
- Risks include higher claims and reserve uncertainty; possible state actions expanding workers’ compensation presumptions or retroactively requiring business-interruption coverage; recession-driven premium declines and credit losses; investment-market and interest-rate volatility; catastrophe losses; and asbestos and environmental litigation. Outcomes and any additional reserve needs for asbestos and environmental claims cannot be reasonably estimated. Travelers had not recognized a subrogation benefit for 2017–2018 California wildfire claims related to PG&E, pending bankruptcy-plan and regulatory developments.
Investor verification priorities
- Track subsequent COVID-19 effects on earned premiums, claims, credit allowances, and each segment’s combined ratio.
- Review investment marks and realized losses, including the lagged Q2 results from private equity and real estate partnerships and any fixed-income credit impairments.
- Monitor reserve development, especially workers’ compensation exposure, asbestos and environmental claims, and the PG&E wildfire recovery process.
- Confirm whether management changes its stated investment-income expectations, dividend plans, or share-repurchase activity as economic and capital conditions evolve.