The Travelers Companies, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Travelers is a property-and-casualty insurer reporting three segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance. This unaudited filing covers the three months ended March 31, 2019; income-statement comparisons are with Q1 2018, and balance-sheet comparisons are with December 31, 2018. Amounts are in U.S. dollars unless otherwise noted.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenues | $7.671 billion | $7.286 billion |
| Earned premiums | $6.855 billion | $6.537 billion |
| Net investment income | $582 million | $603 million |
| Income before tax | $967 million | $778 million |
| Net income | $796 million | $669 million |
| Diluted earnings per share | $2.99 | $2.42 |
| Core income | $755 million | $678 million |
| Operating cash flow | $639 million | $554 million |
| Combined ratio | 93.7% | 95.5% |
| Total assets | $107.246 billion | $104.233 billion at Dec. 31, 2018 |
| Shareholders’ equity | $24.340 billion | $22.894 billion at Dec. 31, 2018 |
| Total debt | $7.057 billion | $6.564 billion at Dec. 31, 2018 |
Net income increased 19% and diluted EPS increased 24% year over year; the larger per-share increase reflected recent share repurchases. The combined ratio improved 1.8 points. The effective tax rate was 18%, versus 14% in Q1 2018.
Underwriting and segment performance
- Earned premiums rose 5%. Gross written premiums increased 6%, while net written premiums increased 3%, partly reflecting the new catastrophe reinsurance treaty effective January 1, 2019.
- Catastrophe losses were $193 million ($152 million after tax), down from $354 million in Q1 2018. Net favorable prior-year reserve development was $51 million ($41 million after tax), compared with $150 million in the prior-year quarter.
- Business Insurance segment income was $414 million, down from $452 million; its combined ratio increased to 98.1% from 97.5%. The quarter included $21 million of net unfavorable prior-year reserve development, including effects associated with New York’s Child Victims Act.
- Bond & Specialty segment income was $138 million, down from $173 million; its combined ratio rose to 81.1% from 74.7%, primarily reflecting less favorable prior-year reserve development.
- Personal Insurance segment income was $278 million, up from $129 million; its combined ratio improved to 90.1% from 97.5%, reflecting lower catastrophe losses, stronger underlying underwriting margins, and higher favorable reserve development.
Cash, investments, debt, and capital
- Cash was $357 million at March 31, versus $373 million at year-end. Operating cash flow was $639 million; investing activities used $586 million and financing activities used $71 million.
- Total investments were $74.517 billion, up from $72.278 billion at year-end. Fixed maturities and short-term securities made up 93% of investments; the fixed-maturity portfolio had an Aa2 weighted-average credit quality.
- Debt increased with the March issuance of $500 million of 4.10% senior notes due 2049; net proceeds were approximately $492 million. Commercial paper outstanding was $100 million.
- Debt-to-total-capital was 22.5%, or 23.2% excluding after-tax unrealized investment gains, within the company’s stated 15%–25% target range. Holding-company cash and short-term investments were $1.92 billion, above its approximately $1.18 billion liquidity target.
- Repurchased 2.9 million shares under the authorization for $375 million and acquired another 0.4 million employee-plan-related shares for $46 million. Paid $205 million in dividends. Book value per common share was $92.94.
Material changes, outlook, and risks
- Management expected strong retention to continue during the remainder of 2019 and described insurance markets as competitive. It expected domestic renewal pricing to remain positive in several lines, with specific trends varying by segment and product.
- For the rest of 2019, management expected underlying underwriting margins to improve in aggregate in Business Insurance and Personal Insurance, assuming loss activity returns to more normal levels; Bond & Specialty was expected to be broadly consistent with 2018. These are directional expectations, not a specific full-year earnings forecast.
- Management expected after-tax net investment income from fixed-income portfolios to be about $20 million higher per quarter for the remainder of 2019 than in the corresponding 2018 quarters, based on slightly higher invested balances and embedded yields. Returns from other portfolios were described as difficult to predict.
- On April 18, 2019, Travelers announced an increase in its quarterly dividend from $0.77 to $0.82 per share, payable June 28, 2019, to shareholders of record June 10.
- The company adopted updated lease accounting, recognizing a $320 million right-of-use asset and $384 million lease liability; adoption had no material effect on results or liquidity.
- Management cautioned that catastrophe and weather losses, reserve-estimation changes, inflation, investment and interest-rate movements, reinsurance availability and cost, competition, regulation, foreign exchange, and economic conditions could affect results.
- Asbestos and environmental claims remain uncertain. Net reserves were approximately $1.243 billion for asbestos and $314 million for environmental claims. The company said additional liabilities could arise, potentially materially, but could not reasonably estimate any such amount. The New York Child Victims Act may also affect claims and reserves.
- Unfunded commitments to private-equity and real-estate partnerships totaled $1.56 billion. The filing also reports quantifiable business-sale indemnification obligations with a maximum of $358 million.
Most important facts for investors to verify
- Whether premium growth and renewal pricing continue to exceed loss-cost trends, particularly as the new reinsurance treaty affects net premiums and earned results.
- Whether the improved consolidated combined ratio persists, and how catastrophe losses and prior-year reserve development evolve by segment.
- Whether Business Insurance reserve pressure related to the Child Victims Act and commercial-auto loss estimates develops beyond current expectations.
- Whether investment income tracks management’s outlook and how interest-rate changes affect portfolio values, shareholders’ equity, and realized results.
- Whether asbestos and environmental reserve estimates remain adequate despite the filing’s stated uncertainty and potential for material future charges.
- How debt, liquidity, dividends, and repurchases change; repurchases and dividends are subject to capital needs, market conditions, regulatory constraints, and other factors.