Travelers Companies, Inc. — Q2 2021 Form 10-Q
Business context and period: Property and casualty insurer reporting the quarter and six months ended June 30, 2021, compared with the same 2020 periods. Its three reportable segments are Business Insurance, Bond & Specialty Insurance, and Personal Insurance. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $8.687B | $7.401B | $17.000B | $15.309B |
| Earned premiums | $7.616B | $6.955B | $15.002B | $14.184B |
| Net investment income | $818M | $268M | $1.519B | $879M |
| Net income (loss) | $934M | $(40)M | $1.667B | $560M |
| Diluted EPS | $3.66 | $(0.16) | $6.53 | $2.19 |
| Combined ratio | 95.3% | 103.7% | 95.9% | 99.5% |
- Q2 catastrophe losses were $475M ($376M after tax), versus $854M in Q2 2020. First-half catastrophe losses were $1.31B, up from $1.19B.
- Net favorable prior-year reserve development was $182M in Q2 and $499M for the first half, compared with $2M and $29M, respectively, in 2020.
- First-half operating cash flow was $3.039B, versus $2.292B. Cash from operations in Q2 was reported as $1.85B.
- At June 30, total assets were $119.76B, total investments $86.55B, shareholders’ equity $29.16B, and debt $7.29B. Debt-to-total capital was 20.0%, or 22.0% excluding after-tax unrealized investment gains; the latter was within the company’s 15%–25% target range.
- Holding-company liquidity was $2.43B, above its approximately $1.21B target. Cash was $689M. Book value per common share was $116.86.
- First-half dividends paid were $436M; share repurchases under authorizations were $756M. The company had $5.41B of repurchase capacity remaining at June 30. A quarterly dividend of $0.88 per share was declared July 20.
- Net unrealized investment gains were $4.11B pre-tax ($3.24B after tax), down from $4.07B after tax at year-end, primarily reflecting higher interest rates.
Material changes and segment performance
- Q2 premiums increased 10%; first-half premiums increased 6%. Net written premiums rose 11% in Q2 and 6% in the first half.
- Net investment income rose sharply year over year, helped by a rebound in returns from non-fixed-maturity investments that had recorded losses in 2020. Fixed-income income was lower, reflecting lower reinvestment yields, partly offset by a larger average portfolio.
- Business Insurance Q2 segment income was $643M, versus a $58M loss; first-half income was $960M, up from $231M. Q2 and first-half combined ratios were 95.3% and 99.3%.
- Bond & Specialty Q2 segment income was $187M, up from $72M; first-half income was $324M, up from $194M. Combined ratios were 78.1% for Q2 and 81.6% for the first half.
- Personal Insurance Q2 segment income was $121M, up from $10M; first-half income was $435M, up from $346M. Combined ratios were 99.7% for Q2 and 95.1% for the first half. Underlying underwriting performance weakened, with higher auto and homeowners losses; comparisons were affected by unusually low pandemic-period auto losses and 2020 premium refunds.
Outlook, commentary and risks
- Management expects after-tax net investment income from the fixed-income portfolio of approximately $425M–$435M in each remaining 2021 quarter, reflecting lower reinvestment yields partly offset by expected portfolio growth. Results from alternative investments and market disruption could differ materially.
- Management expects retention to remain strong by historical standards and says competitive conditions for new business are expected to continue. COVID-19-related premium effects may persist but should diminish if economic conditions remain stable and improve.
- Management identifies catastrophe losses and reserve development as unpredictable. It also highlights inflation, rising repair and replacement costs, labor shortages, vehicle and parts costs, and supply constraints as potential sources of higher claim severity and reserve pressure.
- Gross claim reserves rose $1.39B from year-end, reflecting catastrophe losses, current-year loss-cost trends, and reduced settlement activity amid COVID-related judicial disruption. Asbestos and environmental reserves totaled $1.93B; management warns that additional liabilities could arise and future charges could be material, though they cannot currently be reasonably estimated.
- Other risks include the tort environment and increased attorney involvement, COVID-19 effects, investment credit and interest-rate risk, reinsurance availability and collectability, foreign exchange, regulation, and cyber and operational risks. The filing reports no material change to previously disclosed risk factors.
- The company issued $750M of 3.05% senior notes due 2051. Fitch affirmed all ratings with a stable outlook. Management reported effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- How much reported earnings depend on favorable prior-year reserve development and unusually favorable investment results versus recurring underwriting performance.
- Whether catastrophe losses, inflation and claim severity trends, and delayed settlements put pressure on reserves or future combined ratios.
- Whether Personal Insurance auto and homeowners loss trends improve, and how the post-pandemic comparison affects reported results.
- Whether expected fixed-income investment income is achieved as maturing assets are reinvested at lower yields, and how interest-rate changes affect portfolio values and equity.
- Whether asbestos and environmental exposures, reinsurance recoverables, liquidity, leverage, and the pace of share repurchases remain consistent with management’s assessments and capital plans.