Business context and reporting period
The Travelers Companies, Inc. is a property-and-casualty insurer reporting three segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenues | $10.64bn | $9.30bn | $30.44bn | $27.25bn |
| Net income | $404m | $454m | $1.37bn | $2.02bn |
| Diluted EPS | $1.74 | $1.89 | $5.83 | $8.34 |
| Net investment income | $769m | $593m | $2.14bn | $1.94bn |
| Combined ratio | 101.0% | 98.2% | 101.0% | 96.0% |
- Premium growth: Earned premiums rose 13% in Q3 and 11% for the nine months. Net written premiums increased 14% in both periods.
- Underwriting: The Q3 loss and loss adjustment expense ratio was 73.0%; the expense ratio was 28.0%. Catastrophe losses were $850m for Q3 and $2.87bn year to date. Q3 included $154m of net unfavorable prior-year reserve development; the nine-month period included $11m of net favorable development.
- Cash flow: Operating cash flow was $3.05bn in Q3 and $5.61bn for the first nine months, compared with $5.13bn for the comparable 2022 nine-month period. Nine-month investing cash flow was negative $5.04bn and financing cash flow negative $778m.
- Balance sheet and liquidity: At September 30, total assets were $121.38bn, investments $82.96bn, shareholders’ equity $19.98bn (versus $21.56bn at year-end 2022), and debt $8.03bn (versus $7.29bn). Holding-company liquidity was $1.75bn, above its approximately $1.30bn target. Debt-to-total-capital was 28.7%, or 23.3% excluding after-tax unrealized investment losses.
- Investments and capital returns: Fixed-maturity investments had $8.20bn of pretax unrealized losses ($6.46bn after tax), primarily due to higher interest rates; management described these losses as temporary and not credit-driven. Nine-month dividends paid were $676m and share repurchases under authorizations were $900m.
Material changes versus the prior comparable period
- Q3 net income fell 11% and diluted EPS fell 8%; nine-month net income declined 33% and diluted EPS 30%. Higher catastrophe losses and weaker prior-year reserve development were major factors, partly offset by higher underlying underwriting margins and investment income. Share repurchases moderated the per-share declines.
- Combined ratios deteriorated year over year, chiefly because catastrophe losses were higher. Excluding catastrophe losses and prior-year reserve development, the underlying combined ratio improved by 1.9 points in Q3 and 1.4 points year to date.
- Personal Insurance reported a $193m Q3 segment loss and $648m nine-month loss, versus losses of $111m and $79m, respectively, in 2022. Its combined ratios were 110.0% and 111.3%; higher catastrophe and automobile losses outweighed improved underlying results.
- Business Insurance nine-month segment income decreased 10% to $1.63bn, reflecting catastrophe losses and unfavorable reserve development. Bond & Specialty nine-month segment income rose 2% to $702m, although its underlying combined ratio weakened amid higher expenses, surety losses, and banking-sector-related loss activity.
- The company recorded a $211m one-time tax benefit in Q1 2023 following expiration of a statute of limitations. The nine-month effective tax rate was negative 1%, versus 15% in 2022.
Outlook, commentary, and risks
- Management expects strong retention by historical standards through the remainder of 2023 and into 2024, while competition for new business is expected to remain intense. It expects after-tax investment income from the fixed-income portfolio of approximately $615m in Q4 2023 and $630m–$690m per quarter in 2024; these estimates depend on interest rates and financial-market conditions.
- Because of 2023 catastrophe losses, management expects Q4 share repurchases to be lower than the quarterly levels in Q1 and Q2. A regular $1.00-per-share dividend was declared for payment on December 29, 2023.
- Reserve adequacy remains uncertain, particularly for asbestos and environmental claims. The Q3 review added $284m to net asbestos reserves; net environmental reserves increased $26m in Q3 and $74m year to date. The filing says further adverse development could be material but cannot currently be reasonably estimated.
- Other key risks include catastrophe frequency and severity, inflation and elevated repair costs, the legal/tort environment and attorney involvement, reserve-estimation uncertainty, reinsurance availability and collectability, interest-rate and market volatility, and competitive and regulatory conditions. Management noted labor shortages and higher vehicle, parts, and raw-material costs are affecting claim severity.
- The company issued $750m of 5.45% senior notes due 2053. A.M. Best affirmed the company’s ratings with stable outlook. Management stated that operating cash flows and investment maturities are expected to meet insurance-subsidiary liquidity needs.
Important facts for investors to verify
- Whether catastrophe losses and personal-auto claim severity continue to pressure underwriting results, and how pricing and reinsurance respond.
- Whether asbestos, environmental, and other prior-year reserves prove adequate, including the effects of litigation and changing claim trends.
- Whether the fixed-income investment-income outlook is achieved and how interest-rate movements affect unrealized losses, equity, and capital ratios.
- How much capital is returned through dividends and repurchases given catastrophe losses, premium growth, and regulatory or rating-agency capital needs.
- The sustainability of premium growth and improved underlying underwriting margins, particularly in Personal Insurance and Bond & Specialty.