The Travelers Companies, Inc. — Q3 2015 Form 10-Q
Business and reporting period: Travelers is a property-and-casualty insurer with Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance segments. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are with the same 2014 periods unless stated otherwise. Dollar amounts are in millions except per-share data and where noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenues | $6,794 | $6,886 | $20,126 | $20,379 |
| Earned premiums | $6,032 | $5,983 | $17,851 | $17,734 |
| Net investment income | $614 | $719 | $1,838 | $2,150 |
| Income before taxes | $1,307 | $1,258 | $3,531 | $3,629 |
| Net income | $928 | $919 | $2,573 | $2,654 |
| Diluted EPS | $2.97 | $2.69 | $8.04 | $7.60 |
| Combined ratio | 86.9% | 90.0% | 88.9% | 90.3% |
- Q3 net income increased 1%; diluted EPS rose 10%, with the larger per-share increase reflecting share repurchases. Nine-month net income declined 3%, while diluted EPS increased 6% for the same reason.
- Q3 claims and claim adjustment expenses were $3,382, down 4%. Nine-month claims were $10,360, down 3%. Q3 catastrophe losses were $85 ($56 after tax); nine-month catastrophe losses were $468, versus $668 in 2014.
- Net favorable prior-year reserve development was $199 in Q3 and $649 for the first nine months, compared with $113 and $590, respectively, in 2014. Q3 combined ratio improved 3.1 percentage points; the nine-month ratio improved 1.4 points.
- Net investment income fell 15% in both the quarter and nine-month period. Management cited lower reinvestment yields, a slightly smaller fixed-income portfolio following the asbestos settlement payment, and weaker private-equity and hedge-fund returns.
- Nine-month operating cash flow was $2,674, down from $3,168; the filing attributes the decrease in part to the $579 asbestos-litigation settlement payment. Investing activities used $491 and financing activities used $2,204. Cash was $344 at September 30.
Financial position and capital
- Total assets were $102,110 at September 30, 2015, versus $103,078 at year-end 2014. Investments totaled $72,059; fixed maturities and short-term securities made up 93% of investments.
- Shareholders’ equity was $24,033, down from $24,836. Accumulated other comprehensive income fell to $32 from $880, largely reflecting investment-market and foreign-currency movements. Book value per common share was $79.00.
- Debt was $6,743, up from $6,349. Debt-to-total-capital was 21.9%, or 23.0% excluding after-tax unrealized investment gains; management said the latter was within its 15%–25% target range.
- Holding-company cash and short-term investments totaled $2.04 billion, above the stated minimum target of about $1.1 billion. The company had a $1.0 billion credit facility and $100 million of commercial paper outstanding.
- Travelers issued $400 of 4.30% senior notes due 2045 in August. It intended to use the proceeds and internal funds to repay $400 of 5.50% notes maturing December 1, 2015. A further $400 of notes matures in June 2016.
- In the first nine months, Travelers repurchased 20.8 million shares for $2.15 billion and paid $557 in dividends. It had $4.33 billion remaining under its repurchase authorization at September 30. The declared quarterly dividend was $0.61 per share.
Segment developments
- Business and International Insurance: Q3 operating income was $546, down 1%; nine-month income was $1,604, down 7%. Q3 and nine-month combined ratios improved to 92.2% and 92.9%. International written premiums were pressured by foreign exchange and lower Lloyd’s volume.
- Bond & Specialty Insurance: Q3 operating income increased 19% to $196, with a 57.1% combined ratio. Nine-month operating income fell 8% to $471, and the combined ratio rose to 68.8%, reflecting lower favorable reserve development and reduced investment income.
- Personal Insurance: Q3 operating income was $241, up 1%; nine-month income increased 15% to $667. Combined ratios were 85.1% for Q3 and 86.6% for nine months. Management noted higher Q3 non-weather losses in Homeowners and Other; lower catastrophe losses and more favorable reserve development supported nine-month results.
Outlook, risks, and unusual items
- No specific earnings-per-share or net-income guidance was provided. Management expected competitive insurance markets and historically strong retention. It forecast positive, generally moderating renewal price changes; Personal Insurance underlying underwriting margins were expected to be lower into 2016, while expectations differed by segment.
- Based on the interest-rate environment, Travelers estimated lower reinvestment yields and a smaller fixed-maturity portfolio could reduce after-tax fixed-income investment income by approximately $25–$30 per quarter in Q4 2015 and into 2016, compared with corresponding periods of 2014 and 2015. Further market deterioration could reduce investment income or cause realized losses.
- Asbestos and environmental reserves remain highly uncertain. Travelers increased net asbestos reserves by $224 in Q3; net asbestos reserves were $1,896 at September 30. Net environmental reserves were $378, including a $72 increase recorded in Q2. The company warned that additional liabilities could be material, but could not reasonably estimate their amount.
- The $579 asbestos direct-action settlement was paid in January 2015 and had been fully accrued at December 31, 2014. Separately, a disputed reinsurance claim totaled $503 at September 30 ($238 principal recoverable plus $265 interest). The principal recoverable was recorded; potential interest was treated as an unrecognized gain contingency. Interest accrues at 9% annually while the dispute proceeds.
- Other risks include catastrophe losses, reserve-estimation uncertainty and inflation, competitive pricing, low interest rates and investment-market volatility, foreign-exchange exposure, reinsurance collectability, and regulatory, litigation, and technology risks. Fitch affirmed all ratings with a stable outlook; the filing reported no material changes to previously disclosed risk factors.
- Management stated disclosure controls were effective as of September 30, 2015, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings and the improved combined ratio depended on favorable prior-year reserve development, and whether that development persists.
- The effects of asbestos and environmental claim trends on reserves, including the Q3 asbestos strengthening and uncertainty over ultimate exposure.
- Whether declining investment income and the stated quarterly fixed-income income headwind are offset by underwriting performance.
- The status and collectability of the disputed $503 reinsurance claim, particularly the unrecognized interest component.
- Capital deployment, debt maturities, and the pace of repurchases and dividends relative to catastrophe experience and insurance-subsidiary capital needs.