Travelers Companies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited consolidated results, compared with the three months ended March 31, 2017. Travelers operates through Business Insurance, Bond & Specialty Insurance, and Personal Insurance.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $7.286 billion | $6.942 billion |
| Earned premiums | $6.537 billion | $6.183 billion; up 6% |
| Net income | $669 million | $617 million; up 8% |
| Diluted EPS | $2.42 | $2.17; up 12% |
| Net investment income | $603 million pre-tax; $513 million after-tax | $610 million pre-tax; $480 million after-tax |
| Combined ratio | 95.5% | 96.0% |
| Operating cash flow | $554 million | $848 million |
Claims and claim adjustment expenses were $4.296 billion, versus $4.094 billion. Catastrophe losses were $354 million ($280 million after tax), compared with $347 million. Net favorable prior-year reserve development was $150 million ($119 million after tax), versus $81 million. Although the reported combined ratio improved, the underlying combined ratio, excluding catastrophe losses and prior-year development, was 0.7 points higher than a year earlier.
Segment income: Business Insurance $452 million, up from $442 million; Bond & Specialty Insurance $173 million, up from $145 million; Personal Insurance $129 million, up from $89 million. Segment combined ratios were 97.5%, 74.7%, and 97.5%, respectively. Business Insurance’s ratio worsened 1.1 points, while Bond & Specialty and Personal improved 4.7 and 2.1 points.
Balance sheet and capital: Total assets were $103.676 billion and total investments $71.724 billion at March 31. Shareholders’ equity was $22.979 billion, down from $23.731 billion at year-end; accumulated other comprehensive loss widened to $1.322 billion, principally reflecting a $1.203 billion pre-tax decline in unrealized investment gains. Book value per share was $85.03. Debt was $6.963 billion, and debt-to-total capital was 23.3% (23.4% excluding after-tax net unrealized investment gains), within the stated 15%–25% target range.
Cash was $397 million. Holding-company liquidity was $1.80 billion, above its approximately $1.16 billion target. Net cash used in investing activities was $381 million; net cash used in financing activities was $122 million. The company repurchased 2.5 million shares under its authorization for $350 million and paid $197 million in dividends. Quarterly dividends declared were $0.72 per share during the period.
Material changes and drivers
- Premium growth was broad-based: earned premiums increased 4% in Business Insurance, 5% in Bond & Specialty, and 9% in Personal Insurance. Consolidated gross written premiums rose 6% and net written premiums rose 5%.
- Net income benefited from higher pre-tax income and lower income-tax expense. The effective tax rate was 14%, versus 19%, reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act; the 2017 comparison also included a tax benefit from resolution of prior-year tax matters.
- Pre-tax net investment income declined 1%, primarily due to lower private-equity returns and lower long-term reinvestment rates, partly offset by higher short-term yields. After-tax net investment income increased.
- Operating cash flow declined to $554 million from $848 million, primarily because of higher claim payments, including payments for 2017 catastrophe losses, partly offset by higher premium collections.
- Total shareholders’ equity decreased as unrealized investment gains contracted amid market movements. The quarter’s comprehensive loss was $264 million despite $669 million of net income.
- Travelers issued $500 million of 4.05% senior notes due in 2048, receiving approximately $491 million net proceeds; it also repaid $100 million of debt. Commercial paper outstanding was zero at quarter-end.
Outlook, risks, and unusual items
- Management expected strong retention to continue through 2018, with competitive insurance markets. It forecast positive domestic renewal pricing in several lines, with different expected trends by segment and product.
- For the remainder of 2018, management expected underlying underwriting margins to improve in Business Insurance and Personal Insurance, subject to lower, more normalized weather-related losses. Bond & Specialty margins were expected broadly consistent for the next two quarters, with improvement in the fourth quarter partly reflecting a prior-year international surety loss.
- Management expected the lower corporate tax rate to benefit 2018 results. It also expected after-tax investment income from fixed-maturity and short-term portfolios to be approximately $40 million–$45 million higher per quarter than the comparable 2017 quarters; returns from other portfolios were harder to predict.
- Catastrophe and non-catastrophe weather losses, inflation and loss-cost trends, reserve revisions, competitive pricing, interest-rate changes, investment-market volatility, reinsurance collectability, foreign exchange, regulation, and economic conditions could affect results. Rising rates could reduce fixed-maturity values and shareholders’ equity.
- Asbestos and environmental claims remain materially uncertain. Net asbestos reserves were $1.249 billion; net environmental reserves were $347 million. Management said additional liabilities or reserve changes could be material, but could not reasonably estimate an amount or range.
- The company reported $1.61 billion of unfunded private-equity and real-estate partnership commitments. Quantifiable maximum obligations included $358 million of sale-related indemnifications (of which $1 million was recognized), $45 million of investment and loan guarantees (approximately $23 million indemnified), and $480 million relating to a former subsidiary’s insurance obligations, fully indemnified by a third party.
- After quarter-end, Travelers announced a 7% increase in its regular quarterly dividend, from $0.72 to $0.77 per share, payable June 29, 2018. Management stated future repurchases and dividends depend on capital needs, losses, market conditions, and other factors.
Most important facts for investors to verify
- Whether underlying underwriting performance improves as management expects, especially in Business Insurance and Personal Insurance, and how much results depend on favorable reserve development.
- Actual catastrophe losses and the development of current- and prior-year claims, including asbestos and environmental exposures that could produce material, presently unquantifiable charges.
- Whether fixed-maturity and short-term investment income meets the stated outlook, alongside the effects of interest rates and market movements on investment values and equity.
- Whether liquidity, debt leverage, dividends, and repurchases remain consistent with capital and rating objectives; note that the $1.80 billion holding-company liquidity figure includes proceeds from the new notes.
- The realization of anticipated tax benefits and the effect of competitive pricing, loss-cost inflation, and economic conditions on premium growth and margins.