The Travelers Companies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Travelers is a property-and-casualty insurer operating through Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance. Dollar amounts are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $6,686 | $6,629 |
| Earned premiums | $5,981 | $5,888 |
| Net investment income | $544 | $592 |
| Income before income taxes | $917 | $1,148 |
| Net income | $691 | $833 |
| Diluted EPS | $2.30 | $2.55 |
| Operating cash flow | $850 | $199 |
| Combined ratio | 92.3% | 88.9% |
- Revenue increased 1%, while net income declined 17% and diluted EPS fell 10%. The EPS decline was moderated by share repurchases.
- Premiums grew 2%; gross and net written premiums rose 4% and 5%, respectively. Personal Insurance earned premiums increased 6%; Business and International declined 1%, and Bond & Specialty increased 1%.
- Claims and claim adjustment expenses were $3,712, up 8%. Catastrophe losses were $318 ($207 after tax), versus $162 in Q1 2015. Net favorable prior-year reserve development was $180 ($119 after tax), compared with $243 a year earlier.
- The combined ratio worsened 3.4 points: the loss and loss adjustment expense ratio increased to 61.1% from 57.4%, while the underwriting expense ratio improved to 31.2% from 31.5%. The underlying loss ratio, excluding catastrophe losses and prior-year development, was level year over year.
- Segment operating income: Business and International $476, down 8%; Bond & Specialty $144, up 16%; Personal Insurance $139, down 45%. Personal Insurance was pressured by higher catastrophe losses and less favorable prior-year development. Bond & Specialty benefited from stronger favorable reserve development and underlying underwriting margins.
- Net investment income declined 8%; average pre-tax yield fell to 3.1% from 3.3%, reflecting lower reinvestment rates and weaker hedge fund returns. Net realized investment losses were $9, versus gains of $10 in Q1 2015, including $18 of impairment losses versus $3.
- Operating cash flow rose to $850 from $199; Q1 2015 cash flow was affected by a $579 asbestos direct-action settlement payment. Investing activities used $146, and financing activities used $725. Cash ended the quarter at $361.
- At March 31, total assets were $101.68 billion, investments $71.68 billion, shareholders’ equity $24.17 billion, and debt $6.344 billion. Debt-to-total capitalization was 20.8%, or 22.1% excluding after-tax unrealized investment gains. Book value per common share was $82.65.
- Holding-company cash and short-term investments were $1.71 billion, above the company’s approximately $1.1 billion liquidity target. A $1.0 billion credit facility runs to June 2018; $100 million of commercial paper was outstanding. A $400 million senior note matures June 20, 2016.
Material changes and capital returns
- Share repurchases under authorization totaled 5.1 million shares for $550 million; additional employee-related share acquisitions were 0.5 million shares for $59 million. Remaining authorization was $2.78 billion at quarter-end.
- Shareholders received $180 million in dividends during the quarter. On April 21, 2016, Travelers announced a 10% increase in the regular quarterly dividend, from $0.61 to $0.67 per share.
- Unrealized investment gains increased substantially: other comprehensive income was $571, compared with a loss of $111 in Q1 2015. Net unrealized investment gains were $2.69 billion before tax and $1.76 billion after tax at quarter-end.
Outlook, risks and unusual items
- Management expected competitive insurance markets to continue. Retention was expected to remain strong by historical standards; renewal pricing expectations varied by segment and product. Personal Insurance underlying underwriting margins were expected to be lower for the remainder of 2016 than in the comparable 2015 period; Business and International and Bond & Specialty margins were expected to be broadly consistent.
- Based on the prevailing interest-rate environment, management estimated that lower reinvestment yields and a lower fixed-maturity investment balance could reduce after-tax fixed-maturity investment income by approximately $25–$30 per quarter during the remainder of 2016 versus corresponding 2015 quarters. Returns from non-fixed-maturity investments remained unusually uncertain.
- Management cited catastrophe losses, reserve-estimation uncertainty, inflation and loss-cost trends, competitive pricing, economic conditions, interest rates, foreign exchange, investment-market volatility, regulation, and reinsurance collectability as risks. Actual catastrophe losses or reserve development may differ materially from estimates.
- Asbestos and environmental liabilities are especially uncertain. Gross claims reserves included $2.30 billion for asbestos and environmental claims and related litigation; management said additional liabilities could arise and could materially affect future-period results, though amounts could not be reasonably estimated. Net asbestos reserves were $1.773 billion and net environmental reserves $352 million at March 31.
- Travelers reported a $514 million disputed reinsurance claim, including $238 million recoverable and $276 million accrued contractual interest at March 31. The recoverable was recorded; interest is a gain contingency and was not recognized. A trial on remanded issues was scheduled for July 2016.
- The company expected the Pittsburgh Corning plan to become effective and anticipated making a one-time payment of approximately $525 million in Q2 2016 under its PPG asbestos settlement agreement; the related obligations were included in reserves.
- Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting during the quarter. No rating-agency actions had occurred since the 2015 annual report was filed.
Most important facts for investors to verify
- Whether catastrophe losses and favorable reserve development normalize, and how they affect combined ratios and earnings across segments.
- Whether Personal Insurance margins meet management’s lower-margin outlook and whether premium growth continues amid competitive conditions.
- Actual reinvestment yields, investment income, realized losses, and the sensitivity of equity to interest-rate and market movements.
- Developments in asbestos and environmental claims, the PPG payment, and the disputed $514 million reinsurance claim, including the unrecognized interest contingency.
- Capital deployment and liquidity after the dividend increase, continued repurchases, and the June 2016 debt maturity.