Travelers Companies, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; fourth-quarter figures are separately identified below. Travelers is a property and casualty insurer operating through Business Insurance, Bond & Specialty Insurance, and Personal Insurance.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenues | $30.282 billion | $28.902 billion |
| Net income | $2.523 billion | $2.056 billion |
| Diluted earnings per share | $9.28 | $7.33 |
| Core income | $2.430 billion | $2.043 billion |
| Net earned premiums | $27.059 billion | $25.683 billion |
| Net investment income | $2.474 billion | $2.397 billion |
| Operating cash flow | $4.380 billion | $4.148 billion |
| Combined ratio | 96.9% | 97.9% |
Fourth-quarter 2018 revenue was $7.796 billion and net income was $621 million, or $2.32 diluted EPS, compared with $7.451 billion, $551 million, and $1.98, respectively, in fourth-quarter 2017.
Full-year results benefited from lower catastrophe losses ($1.72 billion versus $1.95 billion), higher underlying underwriting margins and investment income, and a lower effective tax rate (15% versus 25%). These gains were partly offset by lower favorable prior-year reserve development ($517 million versus $592 million), lower realized investment gains ($114 million versus $216 million), and higher claims and expenses. The 2018 tax rate reflects the lower federal corporate rate under the Tax Cuts and Jobs Act; 2017 included a $129 million tax-law enactment charge.
Segments
| Segment | 2018 net written premiums | 2018 segment income | 2018 combined ratio |
|---|---|---|---|
| Business Insurance | $14.956 billion | $1.638 billion | 99.1% |
| Bond & Specialty Insurance | $2.528 billion | $793 million | 69.0% |
| Personal Insurance | $10.224 billion | $297 million | 100.6% |
All three segments grew net written premiums. Business Insurance’s combined ratio deteriorated from 97.8%, with higher commercial auto bodily-injury estimates and less favorable reserve development. Bond & Specialty income rose 43%, benefiting from lower international surety losses and stronger favorable reserve development. Personal Insurance improved from a 103.1% combined ratio, but remained above 100%; catastrophe losses were $1.06 billion.
Financial position, liquidity and capital
- Total assets were $104.233 billion; investments were $72.278 billion, with 93% in fixed maturities and short-term securities. Shareholders’ equity was $22.894 billion, down from $23.731 billion.
- Claims and claim adjustment expense reserves were $50.668 billion, up from $49.650 billion. Favorable prior-year reserve development was $517 million, while catastrophe losses were $1.72 billion.
- Total debt was $6.564 billion. The debt-to-total-capital ratio was 22.3%, or 22.2% excluding after-tax unrealized investment gains and losses. Interest expense was $352 million.
- Holding-company liquidity was $1.42 billion, above its stated approximate $1.17 billion target. The company had a $1.0 billion revolving credit facility, $100 million of commercial paper outstanding, and $2.52 billion of insurance-subsidiary dividends available in 2019 without prior Connecticut regulatory approval.
- Operating cash flow was $4.38 billion; investing activities used $2.33 billion and financing activities used $2.01 billion. The company repurchased 9.6 million shares for $1.27 billion and paid $814 million in shareholder dividends. Year-end book value per share was $86.84, down from $87.46.
- Higher interest rates contributed to a $137 million pretax unrealized loss on fixed maturities at year-end, versus a $1.378 billion unrealized gain in 2017; accumulated other comprehensive loss increased to $1.859 billion.
Outlook, risks and unusual items
- For 2019, management expected retention to remain strong by historical standards and the market to remain competitive. Domestic renewal pricing was expected to stay positive: broadly consistent with 2018 in Business Insurance and management liability, lower for Personal Agency Automobile, and higher for Personal Agency Homeowners and Other.
- Management expected Business Insurance underlying margins to improve and its underlying combined ratio to decline, assuming large losses return to lower, more normal levels. Bond & Specialty was expected to be broadly consistent with 2018; Personal Insurance margins were expected to be slightly higher, with its underlying combined ratio broadly consistent. These are forward-looking expectations, not guarantees.
- After-tax net investment income from fixed-income portfolios was expected to be approximately $80–$100 million higher in 2019 than in 2018, based on slightly higher investment levels and yields. The company emphasized uncertainty around non-fixed-income returns and interest-rate effects.
- Material risks include catastrophe frequency and severity, changing weather and wildfire exposure, reserve-estimation uncertainty and loss-cost inflation, commercial auto bodily-injury severity, asbestos and environmental litigation, reinsurance collectability and availability, investment credit and interest-rate risk, regulation and rate approvals, and technology, cyber and competitive pressures.
- Net asbestos reserves were $1.281 billion and net environmental reserves were $334 million at year-end. 2018 included increases of $225 million and $55 million, respectively. Management said ultimate exposure remains uncertain and additional liabilities could materially affect future results; amounts cannot be reasonably estimated.
- Significant 2018 catastrophe events included California wildfires, Hurricanes Florence and Michael, wind and hail storms, and winter storms. The company’s catastrophe models and reinsurance recoveries are subject to uncertainty; reinsurance does not remove Travelers’ obligations to policyholders.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no material weaknesses.
Important facts for investors to verify
- Whether 2019 pricing and loss-cost trends support management’s expected improvement, particularly in commercial auto and personal homeowners.
- How catastrophe claims, wildfire exposure and reinsurance recoveries develop, and whether the modeled protections remain adequate.
- Whether reserve development remains favorable and whether asbestos, environmental and other long-tail reserves prove sufficient.
- Whether the expected increase in fixed-income investment income materializes, given rate movements and unrealized-loss sensitivity.
- Capital returned through repurchases and dividends relative to catastrophe needs, subsidiary capital, and the company’s ratings and liquidity targets.
- Key reported figures are annual totals unless explicitly labeled fourth quarter; confirm any quarterly comparison against the filing’s unaudited quarterly table.