The Travelers Companies, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing presents unaudited consolidated results for the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Travelers is a property and casualty insurer with Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance segments. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $6,706 | $6,785 | $13,332 | $13,493 |
| Earned premiums | $5,931 | $5,928 | $11,819 | $11,751 |
| Net investment income | $632 | $695 | $1,224 | $1,431 |
| Income before tax | $1,076 | $901 | $2,224 | $2,371 |
| Net income | $812 | $683 | $1,645 | $1,735 |
| Diluted EPS | $2.53 | $1.95 | $5.08 | $4.91 |
| Combined ratio | 90.8% | 95.1% | 89.9% | 90.5% |
- Q2 net income rose 19% and diluted EPS rose 30% year over year; six-month net income fell 5%, while diluted EPS increased 3%, aided by share repurchases.
- Q2 catastrophe losses were $221 million, versus $436 million a year earlier; favorable prior-year reserve development was $207 million, versus $183 million. For the first half, catastrophe losses were $383 million versus $585 million, and favorable reserve development was $450 million versus $477 million.
- Q2 combined-ratio improvement reflected lower catastrophe losses, higher favorable reserve development, and modestly improved underlying underwriting margins. Six-month underlying underwriting margins were lower year over year, with prior-year reserve development and lower catastrophe losses also affecting the comparison.
- At June 30, total assets were $101.66 billion, investments $71.23 billion, shareholders’ equity $24.12 billion, and debt $6.35 billion. Debt-to-total capital was 20.8%, or 21.8% excluding after-tax unrealized investment gains.
- Cash from operations was $875 million for the first half, down from $1.33 billion; investing activities provided $765 million and financing activities used $1.69 billion. The operating cash-flow decline primarily reflected the $579 million asbestos settlement payment.
- Holding-company cash and short-term investments were $1.72 billion, above the stated approximately $1.1 billion minimum target. Cash on the consolidated balance sheet was $317 million. The company had a $1.0 billion credit facility and $100 million of commercial paper outstanding.
- First-half share repurchases totaled $1.40 billion for 13.5 million shares; dividends paid were $369 million. The board added $5.0 billion of repurchase capacity in April; $5.08 billion remained at quarter-end. Book value per share was $77.51.
Material changes and management commentary
- Q2 revenue decreased about 1% year over year, while first-half revenue also decreased about 1%. Premiums were nearly flat in Q2 and up 1% for the first half; declining investment income was the principal revenue headwind.
- Investment income fell 9% in Q2 and 14% for the first half. Management cited lower reinvestment rates, a modestly smaller fixed-income portfolio following the settlement payment, and lower private-equity valuations, including energy-related investments. The Q2 pretax yield was 3.6%, compared with 3.9%.
- Segment operating income in Q2 was $543 million for Business and International Insurance, $151 million for Bond & Specialty, and $174 million for Personal Insurance. For the first half, the respective amounts were $1.06 billion, $275 million, and $426 million. Bond & Specialty declined against unusually strong favorable reserve development in 2014; Personal Insurance improved with lower weather and catastrophe losses and higher favorable reserve development.
- Q2 income tax expense included a $32 million reduction from resolution of prior-year tax matters. Management also cited a first-quarter 2014 reduction in estimated workers’ compensation state-assessment liabilities as a factor affecting comparisons of first-half expenses and underlying margins.
- Other comprehensive income was negative $600 million in Q2 and negative $711 million for the first half, largely reflecting declines in unrealized investment gains. Accumulated other comprehensive income fell to $169 million from $880 million at year-end 2014.
Outlook, risks, and unusual items
- Outlook: The filing gives qualitative operating expectations, not a consolidated earnings or EPS forecast. Management expected competitive insurance markets and generally strong retention. It anticipated positive but moderating renewal premium changes in several lines, with differing segment expectations for underlying margins. It expected Business and International and Bond & Specialty margins to improve against the comparable remainder of 2014; Personal Insurance margins were expected to be lower, reflecting more normalized loss activity.
- Management estimated lower reinvestment yields and a lower fixed-maturity balance could reduce after-tax fixed-income investment income by about $30 million per quarter for the remainder of 2015 versus the corresponding 2014 quarters, and by about $20 million per quarter in 2016 versus 2015. It also expected non-fixed-maturity investment income to be lower in the remainder of 2015 than in the comparable 2014 period.
- The company paid $579 million in January 2015 to settle asbestos direct-action litigation; the amount had been accrued at year-end 2014. Net asbestos reserves were $1.73 billion at June 30, 2015. Environmental reserves increased by $72 million in Q2; net environmental reserves were $391 million.
- Management warned that asbestos and environmental coverage disputes, legal developments, claim trends, and reinsurance recoveries could require additional reserves; potential additional liabilities cannot be reasonably estimated and could materially affect future results. Gross reserves for asbestos and environmental claims totaled $2.26 billion.
- A reinsurance dispute claim totaled $498 million at June 30, including $238 million of reported reinsurance recoverable and $260 million of unrecognized interest. Interest was accruing at 9% annually; the trial was stayed pending appeal. The interest remains a gain contingency and was not recognized in the financial statements.
- Key risks cited include catastrophe and weather losses, reserve estimation and inflation, low interest rates and investment-market losses, competitive pricing, foreign-exchange movements, reinsurance availability and collectability, and regulatory and litigation uncertainty. Management stated that ratings were affirmed with stable outlooks during the period.
Most important facts for investors to verify
- Whether favorable reserve development and below-prior-year catastrophe losses are sustainable, and how much they contributed to reported underwriting results.
- Current and subsequent-period trends in investment income, reinvestment yields, private-equity valuations, and unrealized investment gains.
- Changes in asbestos and environmental claims, reserve adequacy, and outcomes of material coverage litigation, including the unrecognized interest contingency.
- Premium growth, renewal pricing, retention, and underlying margins by segment, particularly in a competitive market and following changes to reinsurance arrangements.
- Capital-return pace relative to earnings, catastrophe exposure, subsidiary capital needs, and the company’s stated leverage target range.