Business context and reporting period
The Travelers Companies, Inc. is a property-and-casualty insurer reporting unaudited results for the quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods. Its reportable segments are Business Insurance, Bond & Specialty Insurance, and Personal Insurance. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $7,477 | $7,184 | $14,763 | $14,126 |
| Earned premiums | $6,695 | $6,351 | $13,232 | $12,534 |
| Net investment income | $595 | $598 | $1,198 | $1,208 |
| Net income | $524 | $595 | $1,193 | $1,212 |
| Diluted EPS | $1.92 | $2.11 | $4.35 | $4.28 |
| Combined ratio | 98.1% | 96.7% | 96.8% | 96.4% |
| Operating cash flow | Not separately stated for the quarter | $1,698 | $1,754 |
Premium growth was broad-based: earned premiums rose 5% in Q2 and 6% for the half year. Q2 net income fell 12%, primarily as higher catastrophe losses and lower realized investment gains outweighed premium growth; lower taxes partly offset the decline. Half-year net income decreased slightly, while diluted EPS rose 2%, helped by share repurchases.
Q2 catastrophe losses were $488 million, versus $403 million a year earlier; first-half losses were $842 million, versus $750 million. Favorable prior-year reserve development was $186 million in Q2 and $336 million for the half year, compared with $203 million and $284 million, respectively, in 2017. The Q2 combined ratio worsened 1.4 points; the half-year ratio worsened 0.4 points. Underlying combined ratios, excluding catastrophe losses and prior-year development, were 0.1 point higher in Q2 and 0.3 point higher for the half year.
Segment results were mixed. Q2 segment income was $385 million for Business Insurance (down 10%), $204 million for Bond & Specialty (up 25%), and a $17 million loss for Personal Insurance (versus $12 million income). For the first half, segment income was $837 million, $377 million, and $112 million, respectively. Personal Insurance’s Q2 combined ratio was 104.9%, reflecting elevated catastrophe losses; Bond & Specialty’s was 66.5%, supported in part by favorable reserve development.
At June 30, total assets were $103.5 billion, investments $71.2 billion, debt $6.46 billion, and shareholders’ equity $22.6 billion. The debt-to-total-capital ratio was 22.2% (22.1% excluding after-tax unrealized investment losses), within management’s 15%–25% target range. Holding-company cash and short-term investments were $1.44 billion, above its approximately $1.16 billion liquidity target. Cash was $415 million. First-half operating cash flow was $1.70 billion; financing used $1.17 billion, including $700 million of authorized share repurchases and $404 million of shareholder dividends.
Material changes, outlook, risks and contingencies
- Shareholders’ equity declined from $23.7 billion at year-end 2017, primarily reflecting $1.30 billion of after-tax other comprehensive loss, alongside repurchases and dividends. The investment portfolio moved from a $1.38 billion pre-tax unrealized gain at year-end to a $138 million pre-tax unrealized loss at June 30, mainly as interest rates rose.
- Management expects strong retention levels through the rest of 2018 and into 2019, with competitive market conditions. It expects positive renewal pricing in key domestic lines, while noting segment-specific differences and the effect of state approval requirements in Personal Insurance.
- Management expects underlying underwriting margins to improve in Business and Personal Insurance in the remainder of 2018 and into 2019, assuming more normalized catastrophe and other weather-related losses. For Bond & Specialty, it expects improvement for the remainder of 2018, with results broadly consistent into 2019.
- Management expects after-tax investment income from fixed-maturity and short-term portfolios to be about $55–$60 million higher per quarter for the remainder of 2018 versus the corresponding 2017 quarters, and about $20–$25 million higher per quarter in 2019 versus corresponding 2018 quarters. It also expects tax benefits from the reduced U.S. corporate tax rate to continue.
- Material risks include unpredictable catastrophe losses; reserve-estimation uncertainty, including inflation and legal or economic changes; interest-rate, credit and investment-market risk; competitive pricing; and foreign-exchange and regulatory developments. Asbestos and environmental litigation outcomes remain uncertain. Net asbestos reserves were $1.18 billion and net environmental reserves $388 million; management says additional liabilities could be material but cannot currently be reasonably estimated.
- The company issued $500 million of 4.05% senior notes due 2048 and repaid $500 million of 5.80% notes at maturity. It renewed its $1.0 billion revolving credit agreement for five years and reported compliance with its covenants. A new catastrophe-bond reinsurance agreement provides up to $500 million of specified coverage, subject to stated attachment and limit terms.
Important facts for investors to verify
- Whether catastrophe experience, including Personal Insurance losses, normalizes as management assumes, and how this affects combined ratios and earnings.
- Whether favorable prior-year reserve development persists; review reserve adequacy, particularly asbestos and environmental exposures and the $55 million environmental reserve increase in the first half.
- Underlying underwriting performance by segment, including pricing versus loss-cost trends and the impact of large commercial losses and windpool assessments.
- Investment income expectations and portfolio sensitivity to interest rates, credit conditions, and less-liquid alternative investments; track unrealized gains and losses.
- Capital returns and financial flexibility: repurchase pace, dividend decisions, liquidity, debt levels, and compliance with credit-agreement covenants.