Travelers Companies, Inc. — 2020 Form 10-K
Business context and reporting period. Travelers is a property and casualty insurance holding company operating through Business Insurance, Bond & Specialty Insurance, and Personal Insurance. This filing covers the fiscal year ended December 31, 2020; quarterly figures below are for the fourth quarter.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $31.98 billion | $31.58 billion |
| Net income | $2.70 billion | $2.62 billion |
| Diluted earnings per share | $10.52 | $9.92 |
| Net earned premiums | $29.04 billion | $28.27 billion |
| Net investment income | $2.23 billion | $2.47 billion |
| Operating cash flow | $6.52 billion | $5.21 billion |
| Combined ratio | 95.0% | 96.5% |
| Total assets / shareholders’ equity | $116.76 billion / $29.20 billion | $110.12 billion / $25.94 billion |
| Total debt / debt-to-total-capital ratio | $6.55 billion / 18.3% | $6.56 billion / 20.2% |
The 2020 combined ratio included catastrophe losses of $1.61 billion, or 5.5 points, and 1.2 points of benefit from favorable prior-year reserve development. The underlying combined ratio improved 2.5 points year over year. The loss and loss adjustment expense ratio was 65.1%; the underwriting expense ratio was 29.9%.
At December 31, 2020, total investments were $84.42 billion, 94% in fixed maturities and short-term securities. The portfolio’s pre-tax net unrealized investment gain was $5.18 billion. Holding-company liquidity was $1.69 billion, above its approximately $1.21 billion target. The company reported $100 million of commercial paper outstanding and had a $1.0 billion revolving credit facility.
Fourth-quarter 2020 revenue was $8.40 billion and net income was $1.31 billion, compared with $8.06 billion and $873 million, respectively, in fourth-quarter 2019. Diluted EPS was $5.10 versus $3.35.
Material changes and segment results
- Business Insurance: segment income fell 6% to $1.31 billion; combined ratio improved to 100.3% from 100.9%. Net written premiums declined 1% to $15.43 billion. Catastrophe losses and lower investment income weighed on results.
- Bond & Specialty Insurance: segment income fell 23% to $473 million; combined ratio rose to 87.4% from 79.5%, mainly reflecting higher management-liability loss estimates. Net written premiums increased 8% to $2.95 billion.
- Personal Insurance: segment income rose 45% to $1.20 billion; combined ratio improved to 89.7% from 94.2%. Lower auto losses associated with reduced driving and favorable reserve development contributed, partly offset by higher catastrophe losses. Net written premiums increased 5% to $11.35 billion.
- Net investment income declined 10%, largely because of lower interest rates and weaker returns from other investments. Operating cash flow increased, principally reflecting lower claim payments and $380 million received from PG&E-related wildfire subrogation recoveries.
Outlook, commentary, risks and unusual items
- Management expects COVID-19 and related economic conditions to continue affecting premium volumes in 2021; the extent and duration are uncertain. Lower earned premiums may pressure the underwriting expense ratio. Management did not provide an overall earnings or combined-ratio forecast.
- For 2021, the company expected after-tax net investment income from its fixed-income portfolio of approximately $420–$430 million per quarter, subject to market disruption and reinvestment yields.
- Management said it expects to continue returning capital through dividends and repurchases, with the combination generally not expected to exceed net income over time. Future repurchases depend on earnings, catastrophe losses, capital needs, ratings, market conditions and other factors.
- COVID-19 affected lines differently: reduced driving lowered Personal Insurance auto losses; management-liability estimates increased in Bond & Specialty; Business Insurance experienced mixed effects. Premium refunds and billing relief also affected revenue and other income.
- Catastrophe losses increased to $1.61 billion from $886 million. Key exposures include severe weather, wildfire, climate-related uncertainty, and possible limits on pricing or reducing catastrophe-exposed business. Reinsurance reduces but does not eliminate exposure; recoveries carry counterparty risk.
- Claims reserves are judgmental and subject to material revision. Total reserves were $54.52 billion. Asbestos reserves were $1.34 billion net of reinsurance after a $295 million increase during 2020; environmental reserves were $307 million net after a $54 million increase. Management said additional asbestos and environmental liabilities could be material but could not be reasonably estimated.
- PG&E-related wildfire recoveries generated a $403 million pre-tax net subrogation benefit in 2020, including $380 million of cash received. The company also adopted expected-credit-loss accounting, reducing opening retained earnings by $43 million after tax.
- KPMG issued unqualified opinions on the financial statements and internal controls. The auditor identified the evaluation of claims and claim adjustment expense reserves as a critical audit matter.
Important facts for investors to verify
- Whether 2020’s favorable personal-auto loss experience and reserve development persist as driving activity and claim settlement patterns normalize.
- Reserve adequacy, particularly for asbestos, environmental, general-liability and COVID-19-related claims; compare subsequent reserve development with the $54.52 billion reserve balance.
- Actual 2021 premium trends, catastrophe losses, reinsurance recoveries and the cost and availability of renewal coverage.
- Whether investment income meets management’s quarterly fixed-income expectation amid low reinvestment yields, and how interest-rate changes affect portfolio value and equity.
- Capital returns and liquidity, including insurance-subsidiary dividend restrictions, the remaining $1.16 billion repurchase authorization, and the sustainability of shareholder dividends.