The Travelers Companies, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise stated. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
- Revenue: Total revenue was $6.626 billion, down 1.2%. Earned premiums rose 1.1% to $5.888 billion, while net investment income fell 19.6% to $592 million. Average pretax investment yield declined to 3.3% from 4.1%.
- Profit: Net income was $833 million, down 20.8%; diluted EPS was $2.55, down 13.6%. Lower investment income, weaker underlying underwriting margins, lower favorable prior-year reserve development and higher catastrophe losses contributed to the decline. Share repurchases moderated the per-share decline.
- Underwriting: The combined ratio increased to 88.9% from 85.7% (lower is generally better). The loss and loss-adjustment expense ratio was 57.4%, versus 56.0%; the underwriting expense ratio was 31.5%, versus 29.7%. Catastrophe losses were $162 million versus $149 million. Net favorable prior-year reserve development was $243 million versus $294 million.
- Segment operating income: Business and International Insurance earned $515 million (down 26%), with a 93.3% combined ratio (89.2% prior year); Bond & Specialty earned $124 million (down 19%), with a 76.1% ratio (68.6%); Personal Insurance earned $252 million (down 6%), with an 83.5% ratio (83.6%).
- Cash flow: Operating cash flow was $199 million, down from $703 million. Investing activities provided $474 million; financing activities used $731 million. Ending cash was $308 million, down from $374 million at year-end 2014. The company attributed weaker operating cash flow in part to payment of the asbestos litigation settlement.
- Balance sheet and capital: Total assets were $102.691 billion and shareholders’ equity was $24.847 billion. Debt was $6.349 billion, unchanged from year-end; debt-to-total capital was 20.4%, or 21.8% excluding after-tax unrealized investment gains. Book value per common share was $77.96. Investments totaled $72.619 billion.
- Liquidity and shareholder returns: Holding-company cash and short-term investments were $1.71 billion, above the approximately $1.1 billion minimum target. The company repurchased 5.6 million shares under its authorization for $600 million and paid $177 million in dividends. Including employee-related share acquisitions, total shares repurchased/acquired were approximately 6.3 million for $672 million. On April 21, the board increased the quarterly dividend 11% to $0.61 per share and authorized an additional $5.0 billion of repurchases.
Material changes and unusual items
- Net investment income declined $144 million, reflecting lower reinvestment yields, modestly lower fixed-income investments, and lower non-fixed-income returns; energy-related investment valuations also weighed on private-equity returns.
- General and administrative expenses rose 13% to $992 million. The comparison was affected by a $76 million reduction in the estimated workers’ compensation state-assessment liability recorded in Q1 2014.
- The company paid $579 million in January 2015 to settle asbestos direct-action litigation. The amount, including $77 million of interest, had been fully accrued at December 31, 2014; the payment therefore affected cash flow rather than creating a new Q1 settlement charge. Net asbestos reserves were $1.836 billion at March 31, down from $2.357 billion at year-end.
- Other comprehensive loss was $111 million, compared with income of $317 million in Q1 2014, primarily reflecting a $274 million pretax foreign-currency translation loss, partly offset by unrealized investment gains.
- At March 31, net unrealized investment gains were $3.17 billion pretax ($2.08 billion after tax). Changes in interest rates can materially affect investment values and equity.
Outlook, risks and contingencies
- Management outlook: Retention was expected to remain strong. Renewal premium changes were expected to remain positive in the business lines discussed, though Personal Insurance renewal changes were expected to be slightly lower than Q1 levels. Management expected underlying margins in Business and International to be modestly higher than the comparable 2014 period, Bond & Specialty broadly consistent, and Personal Insurance lower.
- Management estimated that lower reinvestment yields and a lower fixed-maturity investment base could reduce after-tax fixed-income investment income by approximately $30 million per quarter for the remainder of 2015 versus the corresponding 2014 quarters. Non-fixed-maturity investment income was also expected to be below 2014 levels.
- Key risks include catastrophe and weather losses; uncertainty in claims reserves and favorable reserve development; asbestos and environmental litigation; inflation and long-tail claim costs; investment-market, interest-rate and foreign-exchange movements; competitive pricing; economic weakness; and reinsurance availability and collectability. Management warned that asbestos and environmental reserve uncertainty could lead to future charges that may be material, though the amount cannot currently be reasonably estimated.
- A disputed reinsurance claim was reported at $493 million, including $255 million of unrecognized interest treated as a gain contingency. A trial on remanded issues was scheduled for August 2015. The company stated it would pursue the claim; the interest was not recognized in the financial statements.
- The company reported no material changes to previously disclosed risk factors or market-risk disclosures, no rating-agency actions since its 2014 annual report, and effective disclosure controls as of March 31, 2015.
Important facts for investors to verify
- Whether underwriting performance and reserve development remain favorable, particularly given the higher combined ratio and lower favorable development in Q1.
- How investment income evolves as fixed-income reinvestment yields remain low and non-fixed-income returns fluctuate.
- Whether asbestos and environmental reserves prove adequate, and the outcome and timing of the reinsurance dispute and related interest claim.
- How catastrophe losses, reinsurance treaty changes, competitive conditions and premium trends affect future underwriting margins and cash flows.
- How the announced dividend increase and expanded repurchase authorization affect capital, liquidity and share count; actual future repurchases remain subject to business, regulatory and market conditions.