The Travelers Companies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Travelers is a property-casualty insurer with Business Insurance, Bond & Specialty Insurance, and Personal Insurance segments. Amounts below are U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Key financial results
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Total revenues | $8.275 billion | $8.013 billion | $23.584 billion | $23.518 billion |
| Net income | $827 million | $396 million | $1.387 billion | $1.749 billion |
| Diluted EPS | $3.23 | $1.50 | $5.41 | $6.59 |
| Combined ratio | 94.9% | 101.5% | 97.9% | 97.9% |
| Net investment income | $671 million | $622 million | $1.550 billion | $1.852 billion |
| Operating cash flow | $2.33 billion | Not clearly provided for the quarter | $4.618 billion | $3.793 billion |
- Premium revenue was $7.380 billion in Q3, up 3%, and $21.564 billion for the first nine months, up 3% year over year. Nine-month gross and net written premiums increased 2%.
- Q3 claims and claim adjustment expenses were $4.886 billion, down 7%; nine-month expenses were $14.782 billion, up 2%. Q3 catastrophe losses were $397 million; nine-month catastrophe losses were $1.58 billion, compared with $801 million in 2019.
- Q3 net income rose 109%, primarily reflecting favorable versus unfavorable prior-year reserve development, better underlying underwriting margins, higher investment income and investment gains. The nine-month earnings decline reflected higher catastrophe losses, lower investment income and net realized investment losses.
- Q3 net favorable prior-year reserve development was $142 million, versus $294 million unfavorable in Q3 2019. For the first nine months, development was $171 million favorable, versus $120 million unfavorable in 2019.
Balance sheet, capital and liquidity
- At September 30, 2020, total assets were $116.384 billion, total investments $83.561 billion, shareholders’ equity $27.849 billion and debt $7.050 billion. Book value per common share was $109.94.
- The debt-to-total-capital ratio was 20.2%, or 22.7% excluding after-tax unrealized investment gains; the latter was within management’s 15%–25% target range. Net unrealized investment gains were $4.84 billion pretax and $3.81 billion after tax.
- Holding-company liquidity was $2.28 billion, above the approximately $1.20 billion target. The company reported $100 million of commercial paper outstanding and a $1.0 billion credit facility.
- Nine-month operating cash flow was $4.618 billion. Investing activities used $3.977 billion and financing activities used $552 million. Cash at period-end was $583 million.
- In April, Travelers issued $500 million of 2.55% senior notes due 2050, intending to use proceeds toward repayment of $500 million of notes maturing in November 2020. The company paid $643 million of dividends and repurchased $425 million of shares under its authorization in the first nine months; no authorized repurchases occurred in Q2 or Q3. Management said repurchases could remain reduced or suspended near term.
Segments and material comparisons
- Business Insurance: Q3 segment income was $365 million, up 104%; nine-month income was $596 million, down 37%. Combined ratios were 102.3% for Q3 and 103.8% year to date. Q3 results benefited from lower prior-year reserve charges and higher underlying margins; year-to-date results faced higher catastrophe losses and lower investment income.
- Bond & Specialty Insurance: Q3 segment income was $115 million, down 17%; nine-month income was $309 million, down 31%. Combined ratios were 89.3% for Q3 and 89.7% year to date. Higher management-liability loss estimates, including COVID-19-related effects, pressured margins.
- Personal Insurance: Q3 segment income was $392 million, up 199%; nine-month income was $738 million, up 48%. Combined ratios were 86.4% for Q3 and 91.7% year to date. Lower auto losses as miles driven fell and favorable reserve development supported results, partly offset by catastrophe and weather losses.
Management outlook, risks and unusual items
- Management said COVID-19’s scope and duration remain highly uncertain and that first-nine-month results are not indicative of results for the remainder of 2020. It expected pandemic-related economic weakness to continue affecting premium volumes into the remainder of 2020 and beyond, with possible pressure on the underwriting expense ratio.
- For the fixed-income portfolio, management expected after-tax net investment income to be approximately $35 million–$40 million lower in Q4 2020 than in Q4 2019, and approximately $420 million–$430 million in each quarter of 2021. These estimates could be affected by market disruption and lower reinvestment yields.
- PG&E’s emergence from bankruptcy enabled recoveries for 2017–2018 California wildfire claims. Travelers recognized an estimated $403 million pretax subrogation benefit in Q3, net of expenses and amounts benefiting reinsurers, and received $366 million from the trust during the quarter.
- The 2020 property aggregate catastrophe reinsurance treaty provided up to $280 million of coverage; Travelers recognized its full benefit in Q3. Q3 catastrophe losses included a Midwest derecho, wildfires, Tropical Storm Isaias and Hurricane Laura.
- Asbestos reserves increased by $295 million in Q3 following the annual review; net asbestos reserves were $1.407 billion at September 30. Management cited uncertainty in asbestos and environmental claims and said additional liabilities beyond current reserves could be material, though not reasonably estimable. Gross claims reserves increased $2.57 billion from year-end, partly reflecting catastrophe losses, loss-cost trends and slower settlements amid court-system disruptions.
- Other risks include possible COVID-19-related workers’ compensation presumptions or retroactive business-interruption mandates, elevated claims in some lines, inflation and reserve uncertainty, investment credit and interest-rate risk, catastrophe volatility, reinsurer collectability, and cyber and operational disruption. Management reported no material impact to liquidity from COVID-19 in the first nine months.
- The company adopted the CECL credit-loss standard in 2020, recording a $43 million after-tax opening retained-earnings reduction, primarily related to structured settlements within reinsurance recoverables. No formal full-year earnings guidance was provided.
Important facts for investors to verify
- How much Q3 earnings depended on the PG&E recovery and other favorable reserve development, and whether comparable benefits recur.
- Whether COVID-19, court delays, changing claim patterns and workers’ compensation or business-interruption policy changes alter claims costs and reserve estimates.
- Whether catastrophe activity, asbestos and environmental claims, and adverse tort trends lead to further reserve strengthening.
- Whether investment income meets management’s 2021 expectations as reinvestment yields and non-fixed-income investment returns evolve.
- Whether premium growth, underwriting margins and capital needs support resumed share repurchases while maintaining liquidity and target leverage.