Travelers Companies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated. Travelers is a property-and-casualty insurer, reporting Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance for this period. Segment reporting was realigned effective April 1, 2017, with prior periods to be reclassified in subsequent filings.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Total revenues | $6.942 billion | $6.686 billion; up 4% |
| Earned premiums | $6.183 billion | $5.981 billion; up 3% |
| Net investment income | $610 million | $544 million; up 12% |
| Net income | $617 million | $691 million; down 11% |
| Diluted EPS | $2.17 | $2.30; down 6% |
| Core income | $614 million | $698 million |
| Operating cash flow | $775 million | $850 million |
| Combined ratio | 96.0% | 92.3% |
- Claims and claim adjustment expenses rose 10% to $4.094 billion. The loss ratio increased to 65.3% from 61.1%; the underwriting expense ratio improved to 30.7% from 31.2%.
- Q1 catastrophe losses were $347 million before tax ($226 million after tax), versus $318 million a year earlier. Favorable prior-year reserve development was $81 million before tax ($44 million after tax), compared with $180 million before tax in Q1 2016.
- Segment income: Business and International Insurance $468 million, down from $476 million; Bond & Specialty $129 million, down from $144 million; Personal Insurance $79 million, down from $139 million. Personal Insurance’s combined ratio rose to 99.9% from 93.7%; Business and International’s rose to 96.3% from 94.8%; Bond & Specialty’s rose to 79.3% from 69.3%.
- At March 31, total assets were $101.246 billion, investments $71.257 billion, shareholders’ equity $23.612 billion, and debt $6.438 billion. Debt-to-total-capital was 21.4% (22.0% excluding after-tax unrealized investment gains), within the company’s 15%–25% target range.
- Holding-company cash and short-term investments were $2.11 billion, above its approximately $1.1 billion liquidity target. Consolidated cash was $249 million, down from $307 million at year-end 2016. The company reported $775 million of operating cash inflow, $442 million of investing outflow, and $393 million of financing outflow.
- Average pre-tax investment yield increased to 3.4% from 3.1%. Fixed-maturity portfolio average credit quality was Aa2; below-investment-grade securities were 2.9% of that portfolio.
Material changes and management commentary
- Management attributed lower earnings mainly to reduced favorable prior-year reserve development, weaker underlying underwriting margins, higher catastrophe losses, and lower other revenues, partly offset by higher investment income. The underlying loss ratio excluding catastrophes and prior-year development worsened 2.2 points year over year.
- Investment income growth reflected higher returns from private-equity partnerships, partly offset by lower fixed-maturity income associated with reinvestment rates. The company noted a $39 million reduction in Q1 income-tax expense from resolution of prior-year tax matters; the effective tax rate was 19%, compared with 25%.
- The company repurchased 1.9 million shares under its authorization for $225 million and paid $190 million in dividends. Including employee-related share acquisitions, total shares acquired were 2.4 million for $286 million. On April 20, the board authorized an additional $5.0 billion of repurchase capacity, on top of $709 million remaining at quarter-end, and raised the quarterly dividend from $0.67 to $0.72 per share.
- Travelers agreed to acquire U.K.-based digital small-business insurance provider Simply Business for approximately $490 million, including debt and other obligations. Closing was expected in Q3 2017, subject to regulatory approval and customary conditions; expected funding was a combination of debt and internal resources. The company said it moderated Q1 repurchases to retain financing flexibility for the acquisition.
Outlook, risks, and contingencies
- No formal consolidated earnings guidance was provided. Management expected strong retention by historical standards and competitive insurance markets through the remainder of 2017. It expected underlying underwriting margins broadly consistent with comparable 2016 periods in Business and International and Bond & Specialty; Personal Insurance margins were expected to be slightly higher, with Agency Auto expected to improve as pricing actions earn in.
- In the current low-rate environment, Travelers estimated lower fixed-maturity reinvestment yields could reduce after-tax investment income by approximately $15 million to $20 million per quarter during the remainder of 2017 versus the corresponding 2016 quarters. Future returns on non-fixed-maturity investments were described as difficult to predict.
- Key risks include catastrophe and weather losses, reserve-estimation uncertainty and inflation in claims costs, competitive pricing, investment credit and interest-rate risk, reinsurance collectability and availability, regulatory and tax changes, foreign-exchange movements, and economic and geopolitical uncertainty, including Brexit. Management warned that future asbestos and environmental claim developments could require material additional charges, which could not then be reasonably estimated.
- Net asbestos reserves were $1.268 billion at March 31, 2017; net environmental reserves were $366 million. The company described significant uncertainty in both exposures. It also disclosed $1.60 billion of unfunded investment commitments. A separate reinsurance dispute had a $71 million claim against remaining defendants, including $40 million of unrecognized contingent interest; trial was scheduled for May 1, 2017.
- A $450 million, 5.75% senior note was due December 15, 2017. The company had a $1.0 billion credit facility and a $800 million commercial-paper program, with $100 million of commercial paper outstanding at quarter-end.
Investor verification priorities
- Track catastrophe losses, underlying loss trends—especially personal-auto bodily injury—and reserve development by segment against management’s outlook.
- Review subsequent reserve disclosures, including asbestos and environmental exposures, and outcomes of significant litigation and reinsurance recoveries.
- Confirm Simply Business transaction closing, final purchase economics, financing, and integration progress.
- Assess investment-income trends against the stated quarterly decline estimate, as well as interest-rate, credit, and portfolio valuation changes.
- Monitor capital returns and liquidity alongside acquisition funding, the 2017 debt maturity, and the company’s stated leverage target.