The Travelers Companies, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Property and casualty insurer reporting the quarter and nine months ended September 30, 2017, compared with the same periods of 2016. Its three reportable segments are Business Insurance, Bond and Specialty Insurance, and Personal Insurance. Segment presentation was realigned effective April 1, 2017; prior periods were reclassified.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $7,325 | $6,961 | $21,451 | $20,432 |
| Earned premiums | $6,523 | $6,209 | $19,057 | $18,257 |
| Net income | $293 | $716 | $1,505 | $2,071 |
| Diluted EPS | $1.05 | $2.45 | $5.34 | $7.00 |
| Combined ratio | 103.2% | 92.9% | 98.7% | 92.8% |
| Net investment income | $588 | $582 | $1,796 | $1,675 |
| Operating cash flow | $1.64 billion | Not provided for quarter | $3.22 billion | $3.06 billion |
- Premium growth was broad but led by Personal Insurance: Q3 earned premiums rose 5% overall, with Business Insurance up 2%, Bond and Specialty up 3%, and Personal Insurance up 10%. Nine-month premiums increased 4% overall.
- Q3 claims and claim adjustment expenses rose 25% to $4.81 billion. Catastrophe losses were $700 million pretax ($455 million after tax), mainly from Hurricanes Harvey, Irma and Maria and U.S. wind and hail events. The prior-year quarter had $89 million of catastrophe losses.
- The Q3 combined ratio exceeded 100%, indicating an underwriting loss before investment income. The loss ratio was 72.8%; catastrophe losses contributed 10.5 points. Underlying underwriting margins also weakened as non-catastrophe fire losses were elevated and loss-cost trends modestly exceeded earned pricing.
- Q3 net income fell 59% and diluted EPS fell 57% year over year. For the first nine months, net income declined 27% and diluted EPS declined 24%. Share repurchases moderated the per-share decline.
- Q3 net realized investment gains were $61 million, versus $23 million a year earlier; nine-month gains were $146 million versus $33 million, primarily reflecting equity-security sale gains. Nine-month net investment income increased 7%, though Q3 after-tax investment income declined to $457 million from $472 million.
Financial position, liquidity and capital
- At September 30, 2017, total assets were $104.31 billion, investments $73.09 billion, shareholders’ equity $23.74 billion, and debt $6.92 billion. Total debt rose from $6.44 billion at year-end 2016.
- Debt-to-total-capital was 22.6%, or 23.3% excluding after-tax net unrealized investment gains, within management’s 15%–25% target range. Book value per common share was $86.73.
- Holding-company cash and short-term investments were $1.96 billion, above the approximately $1.1 billion liquidity target. The company reported no commercial paper outstanding. Cash on the consolidated balance sheet was $379 million.
- Nine-month financing included $1.03 billion of authorized share repurchases and $589 million of shareholder dividends. The company had $4.91 billion of remaining repurchase authorization at quarter-end. A quarterly dividend of $0.72 per share was declared in October.
- Investment portfolio fair value included $1.55 billion of net unrealized gains before tax. The fixed-maturity portfolio’s average credit quality was Aa2; below-investment-grade holdings were 2.8% of that portfolio.
Material changes and unusual items
- On August 4, Travelers completed its acquisition of UK small-business insurance provider Simply Business for approximately $464 million, including repayment of debt and other obligations. It also issued about $12 million of restricted shares to certain acquired-company employees. Simply Business contributed less than 1% of consolidated assets, revenue and net income for the quarter.
- In May, Travelers issued $700 million of 4.00% senior notes due 2047; in June it redeemed $107 million of 6.25% junior subordinated debentures. A $450 million, 5.75% senior-note maturity was due December 15, 2017, with management planning to use part of the May issuance proceeds to fund it.
- Nine-month net favorable prior-year reserve development was $299 million, below $507 million in 2016. Q3 development was $15 million, versus $39 million. The third-quarter asbestos review increased net asbestos reserves by $225 million; environmental reserves increased $65 million in the second quarter.
- The company reported a $39 million reduction in nine-month tax expense from resolution of prior-year tax matters. Effective tax rates were 8% for Q3 and 20% for the first nine months, below the 35% statutory rate, primarily due to tax-exempt investment income.
Outlook, commentary and risks
- Management expected strong retention by historical standards through the remainder of 2017 and into 2018, while describing insurance markets as competitive. It forecast positive domestic renewal premium changes in several businesses, with varying segment-specific trends.
- Management expected Business Insurance and Bond and Specialty underlying underwriting margins to be broadly consistent with comparable periods. It anticipated improving Personal Insurance underlying margins, particularly in Agency Automobile; these are qualitative expectations, not earnings or EPS guidance.
- Management expected lower fixed-income reinvestment yields, partly offset by larger fixed-maturity holdings and higher short-term yields, to reduce after-tax investment income from those portfolios by no more than $10 million per quarter versus corresponding quarters of 2016 and 2017. Non-fixed-maturity investment income remained difficult to predict.
- Travelers expected significant fourth-quarter 2017 catastrophe losses from California wildfires that began in early October; the fires were ongoing and the company had no estimate of ultimate losses at filing. Management also identified catastrophe volatility, reserve estimation, inflation and loss-cost trends, competitive pricing, investment-market risks, reinsurance collectability, and asbestos/environmental litigation as material uncertainties.
- Asbestos and environmental reserves remain uncertain and may require material future increases. The filing states that additional liabilities beyond current reserves cannot be reasonably estimated. The company also disclosed $1.55 billion of unfunded private-equity and real-estate partnership commitments.
Important facts for investors to verify
- Subsequent wildfire losses, including their net cost after reinsurance, and their effect on Q4 results and capital.
- Whether loss-cost trends, non-catastrophe fire losses and catastrophe frequency continue to pressure combined ratios, especially in Personal Insurance and Business Insurance.
- Future development of asbestos and environmental reserves, including the effects of litigation, settlements, and reinsurance recoveries.
- Premium retention, renewal pricing and exposure growth relative to loss-cost inflation, along with the realization of management’s segment outlook.
- Investment income and portfolio values under changing interest rates and market conditions, and the pace of share repurchases relative to catastrophe needs and capital targets.