TRAVELERS COMPANIES, INC. quarterly report, Q2 FY2019

Business context and reporting period

The Travelers Companies, Inc. is a property-and-casualty insurer reporting for the quarter and six months ended June 30, 2019. Its segments are Business Insurance, Bond & Specialty Insurance, and Personal Insurance. Amounts below are in U.S. dollars; financial statement amounts are unaudited.

Key financial metrics

• Underwriting and margins: Q2 loss and loss adjustment expense ratio was 68.2% and underwriting expense ratio 30.2%. The underlying combined ratio, excluding catastrophe losses and prior-year reserve development, worsened 1.3 points year over year in Q2 and 0.3 points in the first half.
• Cash flow: Operating cash flow was $1.792B for the first half, versus $1.698B a year earlier; Q2 operating cash flow was reported as $1.15B. Investing activities used $701M and financing activities used $1.050B in the first half.
• Financial position at June 30: Total assets were $108.572B; investments $75.496B; shareholders’ equity $25.321B; and debt $6.558B. Debt-to-total capital was 20.6%, or 21.9% excluding after-tax unrealized investment gains. Holding-company liquidity was $1.46B, above its approximately $1.19B target.
• Capital returns: First-half share repurchases under the authorization were $750M; dividends paid were $419M. The quarterly dividend declared July 23 was $0.82 per share. Remaining repurchase authorization at June 30 was $2.54B.

Material changes versus comparable periods

• Q2 net income rose 6% and diluted EPS 9%; for the first half, net income rose 13% and diluted EPS 17%. The larger EPS increases reflected share repurchases.
• Premiums increased 4% in Q2 and 5% in the first half. Gross written premiums rose 5% in both periods; net written premiums rose 4% in both, with first-half growth affected by a new catastrophe reinsurance treaty.
• Q2 net investment income increased 9%, chiefly from higher fixed-maturity income and returns from private equity partnerships. First-half growth was 3%.
• Catastrophe losses declined to $367M in Q2 from $488M and to $560M in the first half from $842M. Net favorable prior-year reserve development also declined: $123M in Q2 versus $186M, and $174M in the first half versus $336M, as described in management’s results discussion.
• Combined ratio improved 0.7 points for the first half, but worsened 0.3 points in Q2. The Q2 deterioration reflected higher non-catastrophe weather losses and increased loss estimates, partly offset by lower catastrophe losses and a lower expense ratio.
• Segment income diverged: Business Insurance fell 9% in Q2 and the first half; Bond & Specialty fell 15% and 17%, respectively; Personal Insurance returned to Q2 profitability ($88M versus a $17M loss) and first-half income rose to $366M from $112M.
• Shareholders’ equity increased from $22.894B at year-end 2018 to $25.321B, substantially reflecting positive investment-related other comprehensive income. After-tax net unrealized investment gains were $1.88B at June 30, compared with net unrealized losses at year-end.

Outlook, risks and unusual items

• Outlook: Management expects strong retention overall. It anticipates positive renewal pricing across segments, with segment-specific differences. Business Insurance and Personal Insurance underlying underwriting margins are expected to improve over the remainder of 2019 and into 2020, assuming improved international results and more normal non-catastrophe weather losses. Bond & Specialty margins are expected to be broadly consistent. These are forward-looking expectations, not guarantees.
• Investments: Management expects after-tax net investment income from fixed-income portfolios to be about $10M–$15M higher per quarter in the remainder of 2019 than in corresponding 2018 quarters, with first-half 2020 levels broadly consistent with the corresponding 2019 quarters. Interest-rate, credit, market and tax-law changes could affect results and equity.
• Reserves and claims: Claims reserves are inherently uncertain. Asbestos and environmental exposures may require material future reserve increases, which the company says cannot currently be reasonably estimated. Net asbestos reserves were $1.179B and net environmental reserves $359M at June 30. Environmental reserves were increased by $60M in Q2, including a $60M increase to Business Insurance environmental reserves noted in the prior-year development discussion.
• Wildfire exposure: Travelers continues to assess subrogation recoveries related to the 2017 and 2018 California wildfires and PG&E bankruptcy developments; it has recognized no subrogation benefit because of uncertainty.
• Other risks: Catastrophe and non-catastrophe weather losses, inflation and loss-cost trends, reinsurance availability and cost, competition, investment-market movements, regulation, foreign-exchange exposure, and legal developments could materially affect results. The company reported no material change to its previously disclosed risk factors.
• Debt and accounting items: Travelers issued $500M of 4.10% senior notes due 2049 and used the proceeds to repay $500M of 5.90% notes that matured in June. Adoption of lease accounting added a $320M right-of-use asset and $384M lease liability at March 31; management said the adoption did not materially affect results or liquidity.

Investor verification priorities

1. Check the underlying combined ratio and segment underwriting performance against catastrophe losses, prior-year reserve development, and changes in current loss estimates.
2. Track reserve adequacy—especially environmental, asbestos, commercial automobile, and general liability—and developments in the PG&E-related wildfire recovery effort.
3. Verify that written-premium growth and renewal pricing translate into earned-premium growth and adequate margins after the new catastrophe reinsurance treaty’s cost and impact.
4. Monitor investment income, unrealized portfolio gains, interest-rate and credit exposure, and the company’s stated investment-income outlook.
5. Assess capital returns alongside catastrophe exposure, reserve needs, debt, holding-company liquidity, and regulatory capital requirements.