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 Form 10-K covers the fiscal year ended December 31, 2019; quarterly figures below are for the fourth quarter and are unaudited.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $31.58 billion | $30.28 billion |
| Net income | $2.62 billion | $2.52 billion |
| Diluted EPS | $9.92 | $9.28 |
| Net earned premiums | $28.27 billion | $27.06 billion |
| Operating cash flow | $5.21 billion | $4.38 billion |
| Combined ratio | 96.5% | 96.9% |
| Net investment income | $2.47 billion | $2.47 billion |
| Total investments | $77.88 billion | $72.28 billion |
| Total assets | $110.12 billion | $104.23 billion |
| Claims and claim adjustment reserves | $51.85 billion | $50.67 billion |
| Total debt | $6.56 billion | $6.56 billion |
| Shareholders’ equity | $25.94 billion | $22.89 billion |
| Book value per share | $101.55 | $86.84 |
Fourth-quarter revenue was $8.06 billion versus $7.80 billion in Q4 2018; net income was $873 million versus $621 million, and diluted EPS was $3.35 versus $2.32.
The 2019 combined ratio indicates an overall underwriting profit. Catastrophe losses were $886 million, down from $1.72 billion in 2018. The loss and LAE ratio edged up to 66.9% from 66.8%; the expense ratio improved to 29.6% from 30.1%. Net unfavorable prior-year reserve development was $60 million, compared with $517 million of favorable development in 2018. Core income increased to $2.54 billion from $2.43 billion.
Results differed by segment: Business Insurance income fell 15% to $1.39 billion and its combined ratio worsened to 100.9% from 99.1%; Bond & Specialty income fell 22% to $618 million, with its combined ratio at 79.5% versus 69.0%; Personal Insurance income rose 177% to $824 million and its combined ratio improved to 94.2% from 100.6%.
Material changes versus the prior comparable period
- Net written premiums grew 5% to $29.15 billion; earned premiums rose 4% to $28.27 billion. Growth occurred across all three segments, with net written premiums up 4% in Business Insurance, 8% in Bond & Specialty, and 5% in Personal Insurance.
- Lower catastrophe losses were a major earnings tailwind, but were partly offset by the swing from favorable to unfavorable prior-year reserve development and weaker underlying underwriting margins across all segments.
- Operating cash flow increased by $825 million. Management attributed the improvement mainly to higher premium and investment-income receipts and lower general and administrative payments, partly offset by higher claims and commission payments.
- After-tax unrealized investment gains reversed from a $113 million loss at year-end 2018 to a $2.25 billion gain at year-end 2019, primarily as interest rates declined. Shareholders’ equity and book value per share consequently increased.
- The debt-to-total-capital ratio declined to 20.2% from 22.3%; excluding after-tax unrealized investment gains and losses, it was 21.7% versus 22.2%.
Outlook, commentary, risks and unusual items
- For 2020, management expected strong retention and positive renewal pricing. It anticipated higher domestic renewal premium changes in Business Insurance and Bond & Specialty management liability; Personal Insurance auto increases were expected to be positive but lower than 2019, while homeowners changes were expected to be higher.
- Management expected Business Insurance and Personal Insurance underlying underwriting margins to improve in 2020, with much of the anticipated improvement in the second through fourth quarters and dependent in part on lower weather-related losses. Bond & Specialty underlying margin was expected to be broadly consistent with 2019, while its underlying combined ratio was expected to be slightly higher.
- Management forecast after-tax fixed-income investment income to be about $5 million to $10 million lower per quarter in 2020 than in the corresponding 2019 quarters, reflecting lower reinvestment yields, partly offset by somewhat higher investment balances.
- Capital return remained a priority: Travelers repurchased 10.8 million shares for $1.50 billion under its authorization and paid $844 million in shareholder dividends during 2019. The Board declared a $0.82-per-share quarterly dividend in January 2020. Repurchases remain subject to capital, catastrophe, regulatory and market considerations.
- Key risks include catastrophe frequency and severity, climate-related uncertainty, reserve estimation and adverse legal/tort trends, inflation and claims severity, investment credit and interest-rate risk, competition, regulation, cybersecurity and reinsurance collectability. The filing identifies general liability and commercial auto loss deterioration, asbestos and environmental claims, and uncertain catastrophe exposures as areas to monitor.
- Net asbestos reserves were $1.28 billion and net environmental reserves $321 million at year-end. Management said future liabilities could exceed reserves; the amount of any additional exposure could not be reasonably estimated. The company also had not recognized a subrogation benefit for claims associated with the PG&E bankruptcy, citing continuing uncertainty.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. The auditor identified claims and claim adjustment reserves, totaling $51.8 billion, as a critical audit matter because of the judgment and uncertainty involved.
Important facts for investors to verify
- Whether current accident-year claims trends—especially commercial auto and general liability—stabilize, and whether expected 2020 underwriting improvement materializes.
- Reserve development by segment and accident year, including asbestos, environmental, and any effects of legal or tort changes.
- Catastrophe losses, reinsurance protection and recoverability, and concentration of insured exposures in catastrophe-prone regions.
- Investment income and portfolio sensitivity to reinvestment yields, interest rates, credit quality and municipal-bond exposure.
- Holding-company liquidity, insurer dividend capacity, capital ratios, debt maturities and the pace of buybacks and dividends.
- Whether premium growth and renewal pricing continue without weakening retention or underwriting profitability.