Travelers Companies, Inc. — 2016 Form 10-K
Business and reporting period. Travelers is a property-and-casualty insurer operating through Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance. This annual report covers the year ended December 31, 2016; quarterly figures below are for Q4.
Financial performance
Amounts in billions, except per-share data and ratios.
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Total revenue | $27.625 | $26.815 | Up 3% |
| Net earned premiums | $24.534 | $23.874 | Up 3% |
| Net written premiums | $24.958 | $24.121 | Up 3% |
| Net income | $3.014 | $3.439 | Down 12% |
| Diluted EPS | $10.28 | $10.88 | Down 6%; share repurchases moderated the per-share decline |
| Combined ratio | 92.0% | 88.3% | Up 3.7 points; below 100% indicates an underwriting profit |
| Operating cash flow | $4.202 | $3.434 | Up $768 million |
| Net investment income | $2.302 | $2.379 | Down 3%; average pre-tax yield fell to 3.3% from 3.4% |
Catastrophe losses were $877 million, versus $514 million in 2015. Net favorable prior-year reserve development was $771 million, compared with $941 million. The underlying loss and loss adjustment expense ratio rose 1.7 points year over year. Higher catastrophe losses, weaker underlying underwriting margins, lower reserve benefits, and lower investment income contributed to lower earnings.
Q4 2016: Revenue was $7.193 billion and net income was $943 million, compared with $6.678 billion and $866 million, respectively, in Q4 2015. The filing’s supplied quarterly table does not provide a Q4 combined ratio.
Segments
- Business and International Insurance: Operating income was $2.048 billion, down 6%; combined ratio was 94.3%, versus 92.1%. Net written premiums rose 1% to $14.675 billion. International premiums declined, principally reflecting foreign exchange, disciplined underwriting, and weaker European activity.
- Bond & Specialty Insurance: Operating income rose 3% to $653 million; combined ratio improved to 64.4% from 67.9%, with favorable reserve development a significant contributor. Net written premiums rose 1% to $2.099 billion.
- Personal Insurance: Operating income fell 43% to $510 million; combined ratio worsened to 95.1% from 86.6%. Net written premiums grew 10% to $8.184 billion, led by automobile. Results reflected unfavorable prior-year development, more catastrophe losses, and higher auto bodily-injury loss estimates.
Financial position, capital and liquidity
- Total assets were $100.245 billion; total investments were $70.488 billion, 93% in fixed maturities and short-term securities. Fixed maturities had an Aa2 weighted-average credit quality; 2.9% were below investment grade.
- Claims and claim adjustment expense reserves were $47.949 billion, down $346 million from year-end 2015. Shareholders’ equity was $23.221 billion, down from $23.598 billion.
- Total debt was $6.437 billion; debt-to-total-capital ratio was 21.7%, or 22.3% excluding after-tax unrealized investment gains, within management’s 15%–25% target range. A $450 million senior-note maturity was due December 15, 2017.
- Holding-company liquidity was $1.68 billion, above the stated approximately $1.1 billion target. The $1.0 billion revolving credit facility expires June 2018; $100 million of commercial paper was outstanding.
- Operating cash flow was $4.202 billion; investing cash flow used $1.460 billion and financing cash flow used $2.806 billion. Travelers repurchased $2.47 billion of shares and paid $757 million in shareholder dividends during 2016. Year-end book value per share was $83.05.
Material changes, outlook and risks
- Net unrealized investment gains after tax declined to $730 million from $1.289 billion, primarily as interest rates rose. The filing estimates that a 100-basis-point rate increase would reduce fair value of modeled market-sensitive instruments by about $2.19 billion at year-end 2016.
- Unusual items included a $126 million pre-tax ($82 million after-tax) gain from a reinsurance-dispute settlement in Q4. The company also paid $524 million in 2016 to settle PPG asbestos coverage litigation; the obligation had been reserved at year-end 2015. The comparable 2015 period included a $579 million asbestos direct-action settlement payment.
- Asbestos reserves increased by $225 million and environmental reserves by $82 million in 2016. Combined net asbestos and environmental reserves were approximately $1.71 billion at year-end. Management cautions that ultimate liabilities are uncertain and additional charges could be material.
- For 2017, management expected strong retention and competitive markets. It forecast broadly consistent underlying margins in Business and International and Bond & Specialty; Personal Insurance margins were expected to be slightly higher, with auto improvement partly offset by homeowners. Catastrophe losses and reserve development remain unpredictable.
- Management estimated lower reinvestment yields could reduce after-tax fixed-maturity investment income by approximately $15 million–$20 million per quarter in 2017 versus the corresponding 2016 quarters. It also expected to continue returning excess capital through dividends and repurchases, subject to capital needs and other constraints.
- Principal risks include catastrophe frequency and severity, climate-related uncertainty and model limitations; reserve estimation and inflation; asbestos and environmental litigation; reinsurance collectability and availability; interest-rate and credit risks; competition and technology changes; and regulation. The Terrorism Risk Insurance Program was authorized through 2020; the estimated company deductible for 2017 was $2.45 billion.
- KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting; management reported no material weaknesses.
Key facts for investors to verify
- Whether personal-auto bodily-injury loss estimates and the deterioration in the Personal Insurance combined ratio persist, and how pricing actions earn through.
- The quality and sustainability of the $771 million favorable reserve development, alongside asbestos and environmental reserve increases and unresolved litigation.
- Catastrophe exposure, reinsurance protection and recoverability, including the terms and limitations of catastrophe coverage.
- Investment-income sensitivity to reinvestment yields and the effect of interest-rate changes on unrealized gains, book value and capital.
- Cash available at the holding company, regulated-subsidiary dividend capacity, planned capital returns, and the 2017 debt maturity.
- The contribution of the $126 million reinsurance settlement gain and other unusual items to reported earnings and cash flow.