Business context and reporting period
The Travelers Companies, Inc. is a property-casualty insurer reporting Business Insurance, Bond & Specialty Insurance, and Personal Insurance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless stated otherwise. Amounts are in U.S. dollars.
Financial results and position
- Revenue: Third-quarter total revenue was $8.01 billion, up 4%; earned premiums were $7.18 billion, up 4%. Nine-month revenue was $23.52 billion, up 5%, and earned premiums were $21.02 billion, up 5%.
- Profit: Third-quarter net income was $396 million versus $709 million; diluted EPS was $1.50 versus $2.62. Nine-month net income was $1.75 billion versus $1.90 billion; diluted EPS was $6.59 versus $6.97. Share repurchases moderated the per-share declines.
- Underwriting and margins: The consolidated combined ratio was 101.5% for Q3 versus 96.6%, and 97.9% for nine months versus 96.8%. A ratio above 100% indicates an underwriting loss. Q3 included $241 million of catastrophe losses and $294 million of net unfavorable prior-year reserve development. Nine-month catastrophe losses were $801 million, while net unfavorable prior-year development was $120 million.
- Segments: Q3 segment income was $179 million in Business Insurance (down 56%), $139 million in Bond & Specialty (down 29%), and $131 million in Personal Insurance (down 14%). Nine-month segment income was $944 million (down 24%), $451 million (down 21%), and $497 million (up 88%), respectively.
- Investment income: Q3 net investment income was $622 million, down 4%; nine-month income was $1.85 billion, slightly higher. Q3 average pre-tax investment yield was 3.3% versus 3.5%. Management attributed pressure in other portfolios largely to lower private-equity and real-estate partnership returns.
- Cash flow: Nine-month operating cash flow was $3.79 billion versus $3.43 billion. Investing activities used $2.05 billion and financing activities used $1.61 billion. Cash at September 30 was $508 million.
- Balance sheet and capital: Total assets were $110.24 billion and shareholders’ equity was $25.61 billion, versus $104.23 billion and $22.89 billion at year-end 2018. Total debt was $6.56 billion. Debt-to-total capital was 20.4%, or 22.0% excluding after-tax unrealized investment gains. Holding-company liquidity was $1.51 billion, above management’s approximately $1.19 billion target. The investment portfolio totaled $77.42 billion; fixed maturities and short-term securities were 94% of investments.
- Shareholder returns: The company repurchased 8.0 million shares for $1.13 billion in the first nine months and paid $633 million of dividends. It had $2.16 billion of repurchase authorization remaining. Quarterly dividends declared were $0.82 per share.
Material changes versus the prior comparable period
- Q3 earnings declined as reserve development swung from $14 million favorable in Q3 2018 to $294 million unfavorable in Q3 2019; lower underlying underwriting margins and lower investment income also weighed on results. Catastrophe losses were lower than the prior-year quarter ($241 million versus $264 million).
- For the first nine months, reserve development swung from $350 million favorable in 2018 to $120 million unfavorable in 2019. Catastrophe losses declined from $1.11 billion to $801 million, partly offsetting weaker underlying underwriting margins.
- Premium growth continued across all three segments, while the new catastrophe reinsurance treaty reduced net written premium growth and affected earned premiums. Nine-month gross written premiums rose 6% and net written premiums rose 5%.
- After-tax unrealized investment gains helped lift equity: accumulated other comprehensive income moved from a $1.86 billion loss at year-end 2018 to $625 million income at September 30, 2019. The company reported $2.35 billion of after-tax net unrealized investment gains.
Outlook, commentary, and risks
- Management expected strong retention to continue and positive renewal pricing across major domestic markets, with specific pricing expectations varying by segment and product. The property-casualty market was expected to remain competitive.
- For Q4 2019 and the first three quarters of 2020, management generally expected improving underlying underwriting performance in Business Insurance and Personal Insurance, subject to stated assumptions about pricing, loss trends, and weather. Bond & Specialty underwriting was expected to be broadly consistent to slightly weaker. These are forward-looking expectations, not guarantees.
- Management expected after-tax investment income from fixed-income portfolios to be broadly consistent with Q4 2018, then approximately $10 million to $15 million lower per quarter in the first three quarters of 2020 versus the corresponding 2019 quarters, reflecting lower reinvestment yields.
- Reserve uncertainty is significant. The company added $220 million to net asbestos reserves in Q3 and $68 million to environmental reserves in the first nine months. Net asbestos reserves were $1.35 billion and net environmental reserves $345 million at September 30. The company said further adverse development could be material but could not reasonably estimate a range.
- Travelers had not recognized a subrogation benefit for claims related to the 2017 and 2018 California wildfires against PG&E, citing uncertainty around PG&E’s bankruptcy and related proposals. Other key exposures include catastrophe and non-catastrophe weather losses, inflation and loss-cost trends, adverse reserve development, tort and legal-environment changes, reinsurance recoverability, interest-rate and credit risk, and asbestos/environmental litigation.
- The company issued $500 million of 4.10% senior notes due 2049 and used the proceeds to repay $500 million of 5.90% notes at maturity. S&P affirmed its ratings with a stable outlook. Management reported effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- Track reserve development, especially asbestos, environmental, commercial automobile, and general liability claims, and assess whether the Q3 adverse trends persist.
- Monitor underlying combined ratios separately from catastrophe losses and prior-year reserve development; Q3’s consolidated ratio exceeded 100%.
- Assess whether premium and renewal-price increases keep pace with loss-cost inflation, weather losses, and reinsurance costs.
- Review investment income against management’s lower-yield outlook, alongside interest-rate effects on portfolio value and shareholders’ equity.
- Confirm the continued adequacy of holding-company liquidity, capital levels, and shareholder returns as catastrophe losses and operating-company capital needs evolve.