Travelers Companies, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Travelers is a property-and-casualty insurer with Business Insurance, Bond & Specialty Insurance, and Personal Insurance segments. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Premiums | $8.32bn | $7.62bn | $16.33bn | $15.00bn |
| Total revenues | $9.14bn | $8.69bn | $17.95bn | $17.00bn |
| Net investment income | $707m | $818m | $1.34bn | $1.52bn |
| Net income | $551m | $934m | $1.57bn | $1.67bn |
| Diluted EPS | $2.27 | $3.66 | $6.43 | $6.53 |
| Combined ratio | 98.3% | 95.3% | 94.8% | 95.9% |
| Operating cash flow | $1.38bn | — | $2.64bn | $3.04bn |
Q2 income before tax was $657m, versus $1.13bn a year earlier. Q2 catastrophe losses were $746m ($587m after tax), and net favorable prior-year reserve development was $291m ($229m after tax). Six-month catastrophe losses were $906m versus $1.31bn; favorable prior-year development was $444m versus $499m. Premium growth reflected higher written business; gross and net written premiums each rose 11% in the first half.
Segment results: Q2 segment income was $666m in Business Insurance, $228m in Bond & Specialty, and a $193m loss in Personal Insurance. Personal Insurance’s 111.2% Q2 combined ratio reflected catastrophe losses, elevated auto and homeowners severity, and weaker prior-year development. Business Insurance’s ratio was 93.2%; Bond & Specialty’s was 74.0%. For the first half, Personal Insurance earned just $32m, down from $435m.
Financial position, liquidity, and capital
- At June 30, total assets were $116.59bn, investments $80.46bn, shareholders’ equity $22.87bn, and debt $7.29bn. Debt was broadly unchanged from year-end 2021.
- Debt-to-total-capital was 24.2%; excluding after-tax unrealized investment gains and losses, it was 21.5%, within the company’s stated 15%–25% target range.
- Holding-company cash and short-term investments were $1.56bn, above its approximately $1.21bn liquidity target. Cash was $710m at quarter-end. A new $1.0bn revolving credit agreement runs to June 2027; $100m of commercial paper was outstanding.
- Six-month operating cash flow was $2.64bn. Investing activities used $1.37bn and financing activities used $1.30bn. The company repurchased $1.00bn of shares under authorizations and paid $436m in dividends.
- Higher interest rates drove fixed-maturity unrealized losses: the portfolio’s net pre-tax unrealized position shifted from a $3.06bn gain at year-end 2021 to a $4.81bn loss at June 30, 2022. Shareholders’ equity fell from $28.89bn at year-end, largely reflecting investment-related other comprehensive losses. Book value per share was $96.39.
Material changes and management outlook
Q2 net income fell 41% year over year, while diluted EPS fell 38%; share repurchases moderated the per-share decline. Management attributed the earnings decrease chiefly to higher catastrophe losses, net realized investment losses versus gains, lower investment income, and weaker underlying underwriting margins. The Q2 combined ratio worsened by 3.0 points. For the first half, net income declined 6%, while the combined ratio improved by 1.1 points, principally because catastrophe losses were lower.
Investment income was pressured by lower returns from private-equity partnerships and other non-fixed-income investments, following particularly strong 2021 performance. Management expected after-tax fixed-income investment income of approximately $470m in Q3 and $495m in Q4 2022, with second-half income from other investments expected to be significantly below both the prior-year second half and 2022 first half. Management expected retention to remain strong by historical standards and new-business markets to remain competitive. It gave no overall earnings or combined-ratio forecast in the supplied filing text.
The company stated that it expects to return capital not needed for operations, but future buybacks depend on earnings, catastrophe losses, capital needs, market conditions, and other factors. On July 21, 2022, it declared a regular $0.93-per-share dividend payable September 30, 2022.
Risks, contingencies, and unusual items
- Inflation, labor shortages, higher used-vehicle and parts costs, supply-chain pressures, and tort-environment developments could increase claim severity and reserve needs. Catastrophe and non-catastrophe weather losses are unpredictable.
- Asbestos and environmental claims carry substantial estimation and litigation uncertainty. Net asbestos reserves were $1.23bn at June 30; net environmental reserves were $363m. Environmental reserves increased $83m in the first half of 2022. Additional liabilities could exceed current reserves and could materially affect future results; the company says such additional amounts cannot currently be reasonably estimated.
- The company recorded $38m and $83m of net environmental reserve increases in Q2 and the first half, respectively. It also reported $444m of favorable prior-year reserve development in the first half, which supported earnings and underwriting results.
- Interest-rate and market movements may materially affect investment values and equity; private-equity, hedge-fund, and real-estate partnership returns are more volatile and reported with a lag. Other key exposures include reinsurance collectability and availability, regulatory and legal changes, foreign exchange, cyber and operational risks, and rating changes.
- A new $575m catastrophe-bond reinsurance agreement provides specified coverage through May 2026, subject to attachment and coverage limits. The filing describes renewed catastrophe treaties effective July 1, 2022.
Most important facts for investors to verify
- Whether Personal Insurance pricing and claim severity improve enough to restore underwriting profitability, particularly given its 111.2% Q2 combined ratio.
- Future catastrophe losses and the level and sustainability of favorable prior-year reserve development.
- Whether fixed-income reinvestment yields offset lower private-equity and other investment returns, and how interest-rate changes affect portfolio value and equity.
- Reserve adequacy and developments in asbestos, environmental, inflation-sensitive, and other long-tail claims.
- Capital-return pace relative to earnings, liquidity, and the company’s capital needs; confirm subsequent buybacks and dividend declarations in later filings.