Travelers Companies, Inc. — Q3 2021 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021; unaudited. Travelers is a property-casualty insurer with Business Insurance, Bond & Specialty Insurance, and Personal Insurance segments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $8,805 | $8,275 | $25,805 | $23,584 |
| Net income | $662 | $827 | $2,329 | $1,387 |
| Diluted EPS | $2.62 | $3.23 | $9.16 | $5.41 |
| Combined ratio | 98.6% | 94.9% | 96.8% | 97.9% |
| Net investment income | $771 | $671 | $2,290 | $1,550 |
| Operating cash flow | $2.54 billion | Not stated for quarter | $5.58 billion | $4.62 billion |
- Revenue and premiums: Earned premiums rose 6% year over year to $7.83 billion in Q3 and 6% to $22.83 billion for the first nine months. Nine-month gross and net written premiums each increased 7%.
- Profit and underwriting: Q3 net income fell 20% and diluted EPS fell 19%, despite higher revenue. The combined ratio worsened 3.7 points, largely reflecting higher catastrophe losses and a swing to unfavorable prior-year reserve development. Nine-month net income increased 68%; the combined ratio improved 1.1 points.
- Claims and catastrophes: Q3 catastrophe losses were $501 million pre-tax ($395 million after-tax), compared with $397 million in Q3 2020; Hurricane Ida and severe storms were principal 2021 contributors. Nine-month catastrophe losses were $1.81 billion versus $1.58 billion.
- Reserve development: Q3 prior-year development was net unfavorable by $56 million, versus net favorable development of $142 million in Q3 2020. For the first nine months, development was net favorable by $443 million versus $171 million. The Q3 2021 asbestos review added $225 million to net asbestos reserves; net asbestos reserves were approximately $1.41 billion at September 30.
- Segment performance: Q3 Business Insurance income rose to $558 million from $365 million, and Bond & Specialty income rose to $174 million from $115 million. Personal Insurance reported a $2 million loss versus $392 million income, with its combined ratio rising to 104.6% from 86.4%. For the first nine months, Personal Insurance income declined to $433 million from $738 million.
- Investment income and portfolio: Nine-month net investment income increased 48%, including unusually strong returns from non-fixed-income investments; fixed-maturity income was slightly lower. Total investments were $87.51 billion. Net unrealized investment gains were $3.43 billion pre-tax ($2.70 billion after-tax), down from year-end as higher interest rates reduced bond valuations. Nine-month other comprehensive income was negative $1.34 billion after tax.
- Cash, capital and debt: Total assets were $120.71 billion and shareholders’ equity $28.47 billion at quarter-end. Debt was $7.29 billion; debt-to-total-capital was 20.4%, or 22.0% excluding after-tax unrealized investment gains, within the company’s stated 15%–25% target range. Holding-company liquidity was $2.01 billion, above its approximately $1.19 billion target. The company issued $750 million of 3.05% senior notes due 2051 during June.
- Capital returned: Q3 repurchases and dividends totaled $821 million. For the first nine months, the company repurchased 8.8 million shares for $1.36 billion and paid $655 million in dividends. Remaining repurchase authorization was $4.81 billion. A quarterly dividend of $0.88 per share was declared on October 19, 2021.
Material changes and management commentary
- Management attributed the Q3 earnings decline primarily to higher catastrophe losses, unfavorable versus favorable prior-year reserve development, and lower realized investment gains, partly offset by higher investment income and stronger underlying underwriting margins.
- Nine-month earnings benefited from higher investment income, more favorable prior-year reserve development, improved underlying underwriting margins and realized investment gains versus losses in 2020. Comparability is affected by the prior-year period’s market disruption and a $403 million pre-tax net estimate of PG&E wildfire subrogation recoveries recognized in Q3 2020.
- Management said earned pricing exceeded loss-cost trends in Business Insurance and Bond & Specialty Insurance. Personal Insurance results were pressured by a return toward higher auto claim activity after unusually low pandemic-period losses, as well as higher homeowners losses.
- The filing does not provide formal full-year earnings or EPS guidance. For the fixed-income portfolio only, management expected after-tax net investment income of $425–$435 million in Q4 2021 and $420–$430 million per quarter in 2022, subject to market conditions. Management expected historically strong retention levels to continue, while new-business markets remained competitive.
Risks, contingencies and unusual items
- Management identified catastrophe and weather volatility, inflation and rising repair costs, loss trends, reserve estimation uncertainty, COVID-19 effects, market and interest-rate risk, and a more aggressive tort environment as potential drivers of future results. Labor shortages and higher used-vehicle, parts and raw-material costs were already pressuring claim severity.
- Asbestos and environmental reserves are inherently uncertain. The company stated that additional liabilities beyond current reserves could be material, but could not reasonably estimate their amount or range. Environmental reserves were increased by $9 million in Q3 and $61 million in the first nine months of 2021.
- The 2021 catastrophe aggregate excess-of-loss treaty had reached $2.0 billion of qualifying losses by September 30; Travelers recognized a $95 million benefit and reported up to $255 million of remaining coverage, subject to treaty terms.
- Unfunded investment commitments were $1.64 billion. The maximum quantifiable contingent indemnification obligation related to sold businesses was $351 million. A $480 million guarantee of a former subsidiary’s insurance obligations was fully indemnified by a third party.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether elevated catastrophe activity, inflation and claim severity continue to pressure Personal Insurance and the consolidated combined ratio.
- How asbestos, environmental and other long-tail reserves develop, particularly following the Q3 asbestos strengthening and ongoing legal uncertainty.
- Whether investment income remains supported by private-equity and other non-fixed-income returns, and how lower reinvestment yields and interest-rate moves affect portfolio income and equity.
- Whether the 2021 catastrophe reinsurance treaty’s remaining coverage is sufficient for subsequent losses and how recoveries affect reported catastrophe costs.
- How share repurchases, dividends and premium growth affect capital levels, leverage and the company’s ability to maintain its stated ratings and capital objectives.