Business context and reporting period
The Travelers Companies, Inc. is a property-and-casualty insurer operating through Business Insurance, Bond & Specialty Insurance, and Personal Insurance. This unaudited Form 10-Q covers the three months ended March 31, 2021; comparisons are with the first quarter of 2020 unless stated otherwise. Amounts are in U.S. dollars.
Financial and operating results
- Revenue and earnings: Total revenue was $8.31 billion, up 5%; net income was $733 million, up 22%. Diluted EPS rose 23% to $2.87. Premiums were $7.39 billion, up 2%.
- Investment income: Net investment income increased 15% to $701 million ($590 million after tax). Average pre-tax investment yield was 3.5%, versus 3.2%. Higher returns from private-equity partnerships more than offset lower fixed-income and short-term income.
- Underwriting: The combined ratio was 96.6%, compared with 95.5%; below 100% generally indicates an underwriting gain. Catastrophe losses were $835 million pre-tax, versus $333 million. Net favorable prior-year reserve development was $317 million, versus $27 million. Excluding catastrophes and prior-year development, the underlying combined ratio improved 1.8 points.
- Segments: Segment income was $317 million for Business Insurance (up 10%), $137 million for Bond & Specialty (up 12%), and $314 million for Personal Insurance (down 7%). Combined ratios were 103.5%, 85.2%, and 90.3%, respectively. Personal Insurance faced higher catastrophe and homeowners losses; Business Insurance premiums were affected by reduced exposures and new business.
- Cash flow: Operating cash flow was $1.19 billion, versus $628 million. Investing activities used $774 million, versus providing $84 million; financing activities used $477 million, including repurchases and dividends. Cash ended the quarter at $663 million.
- Balance sheet and capital: Total assets were $117.03 billion and shareholders’ equity was $28.27 billion. Debt was $6.55 billion, unchanged from year-end. Debt-to-total-capital was 18.8%, or 20.5% excluding after-tax unrealized investment gains. Book value per share was $112.42. Holding-company liquidity was $1.76 billion, above the company’s approximately $1.21 billion target.
- Shareholder returns: The company returned $613 million in the quarter through $397 million of repurchases and $216 million of declared dividends. It declared $0.85 per share. On April 20, 2021, the board authorized an additional $5.0 billion of repurchases and announced an increase in the quarterly dividend to $0.88.
Material changes versus the prior period
Earnings growth reflected greater favorable reserve development, investment gains rather than losses, higher investment income, and stronger underlying underwriting margins; higher catastrophe losses partly offset these factors. Net realized investment gains were $44 million versus a $98 million loss. The combined ratio worsened because catastrophe losses rose substantially, despite improvement in underlying underwriting performance. Comprehensive loss was $478 million, compared with $89 million, primarily reflecting a $1.60 billion pre-tax decline in unrealized gains on investment securities; accumulated other comprehensive income fell to $1.29 billion from $2.50 billion at year-end.
Outlook, risks, and unusual items
- Outlook: Travelers said COVID-19 and related economic effects remained highly uncertain and it could not predict their impact on the remainder of 2021. It expected after-tax net investment income from the fixed-income portfolio of approximately $420–$430 million in each remaining quarter of 2021, subject to market disruption and reinvestment yields. No full-year earnings or combined-ratio guidance was provided in the supplied filing text.
- Underwriting and reserves: Winter and wind storms drove much of first-quarter catastrophe losses. Claims reserves increased by about $819 million from year-end, reflecting catastrophe losses, current-year loss-cost trends, and slower claim settlement activity, partly associated with COVID-19-related court disruptions. Reserve estimates may change; inflation, the tort environment, claims trends, and future catastrophe activity could materially affect results.
- Legacy claims and litigation: Gross reserves included $1.97 billion for asbestos and environmental claims. Management said outcomes remain uncertain and additional liabilities beyond current reserves could be material, but cannot currently be reasonably estimated. Environmental reserves were increased by $33 million in the quarter. The filing also describes other litigation, commitments, and guarantees; it does not quantify a reasonably estimable material exposure for other non-insurance-contract lawsuits.
- Investments and market risks: Fixed maturities and short-term securities were 94% of investments; the fixed-maturity portfolio’s weighted-average credit quality was Aa2. Rising interest rates could reduce investment values and shareholders’ equity, while lower reinvestment yields may pressure future investment income. Other investments may offer higher returns but have greater volatility and lower liquidity.
- Other items: Share repurchases and the dividend increase are subject to capital needs, catastrophe losses, regulatory constraints, market conditions, and board discretion. The filing reported no material changes to disclosed risk factors or market-risk disclosures and no material impact of COVID-19 on liquidity during the quarter.
Important facts for investors to verify
- Whether catastrophe losses and favorable reserve development persist at levels that materially change underwriting results.
- How COVID-19, economic conditions, inflation, claim-settlement patterns, and the tort environment affect premiums, claims, and reserves.
- Whether the projected $420–$430 million of after-tax fixed-income investment income per remaining 2021 quarter is achieved, and how interest rates affect portfolio values.
- The adequacy of asbestos and environmental reserves and developments in related litigation and reinsurance recoveries.
- Future repurchase and dividend execution relative to earnings, capital requirements, and the announced authorization.