Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company’s financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2019
First
Quarter Consolidated Results of Operations
|
|
•
|
Net income of
$796 million
, or
$3.01
per share basic and
$2.99
per share diluted
|
|
|
•
|
Net earned premiums of
$6.86 billion
|
|
|
•
|
Catastrophe losses of
$193 million
(
$152 million
after-tax)
|
|
|
•
|
Net favorable prior year reserve development of
$51 million
(
$41 million
after-tax)
|
|
|
•
|
Combined ratio of
93.7%
|
|
|
•
|
Net investment income of $
582 million
(
$496 million
after-tax)
|
|
|
•
|
Operating cash flows of $639 million
|
2019
First
Quarter Consolidated Financial Condition
|
|
•
|
Total investments of
$74.52 billion
; fixed maturities and short-term securities comprised
93%
of total investments
|
|
|
•
|
Total assets of
$107.25 billion
|
|
|
•
|
Total debt of
$7.06 billion
, resulting in a debt-to-total capital ratio of
22.5%
(
23.2%
excluding net unrealized investment gains, net of tax)
|
|
|
•
|
Repurchased
3.3
million common shares for total cost of
$421 million
and paid $205 million of dividends to shareholders
|
|
|
•
|
Shareholders’ equity of
$24.34 billion
|
|
|
•
|
Net unrealized investment gains of $1.28 billion ($1.01 billion after-tax)
|
|
|
•
|
Book value per common share of $92.94
|
|
|
•
|
Holding company liquidity of
$1.92 billion
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions, except ratio and per share amounts)
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Premiums
|
|
$
|
6,855
|
|
|
$
|
6,537
|
|
Net investment income
|
|
582
|
|
|
603
|
|
Fee income
|
|
109
|
|
|
103
|
|
Net realized investment gains (losses)
|
|
53
|
|
|
(11
|
)
|
Other revenues
|
|
72
|
|
|
54
|
|
Total revenues
|
|
7,671
|
|
|
7,286
|
|
|
|
|
|
|
Claims and expenses
|
|
|
|
|
|
|
Claims and claim adjustment expenses
|
|
4,442
|
|
|
4,296
|
|
Amortization of deferred acquisition costs
|
|
1,117
|
|
|
1,061
|
|
General and administrative expenses
|
|
1,057
|
|
|
1,062
|
|
Interest expense
|
|
88
|
|
|
89
|
|
Total claims and expenses
|
|
6,704
|
|
|
6,508
|
|
Income before income taxes
|
|
967
|
|
|
778
|
|
Income tax expense
|
|
171
|
|
|
109
|
|
Net income
|
|
$
|
796
|
|
|
$
|
669
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
Basic
|
|
$
|
3.01
|
|
|
$
|
2.45
|
|
Diluted
|
|
$
|
2.99
|
|
|
$
|
2.42
|
|
|
|
|
|
|
Combined ratio
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
64.0
|
%
|
|
64.9
|
%
|
Underwriting expense ratio
|
|
29.7
|
|
|
30.6
|
|
Combined ratio
|
|
93.7
|
%
|
|
95.5
|
%
|
The following discussions of the Company’s net income and segment income are presented on an after-tax basis. Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted. Discussions of net income per common share are presented on a diluted basis.
Overview
Diluted net income per share of
$2.99
in the
first
quarter of
2019
increased by
24%
over diluted net income per share of
$2.42
in the same period of
2018
. Net income of
$796 million
in the
first
quarter of
2019
increased by
19%
over net income of
$669 million
in the same period of
2018
. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses, (ii) higher underlying margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") and (iii) net realized investment gains versus net realized investment losses in the same period of 2018, partially offset by (iv) lower net favorable prior year reserve development and (v) lower net investment income. Catastrophe losses in the
first
quarters of
2019
and
2018
were
$193 million
and
$354 million
, respectively. Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
was
$51 million
and
$150 million
, respectively. Underlying underwriting margins were higher in each segment, primarily in Personal Insurance and Business Insurance, in the
first
quarter of
2019
compared to the same period of
2018
. Income tax expense in the
first
quarter of
2019
was higher than in the same period of
2018
, reflecting the impacts of the increase in income before income taxes in the first quarter of 2019 and lower tax expense in the first quarter of 2018 related to unrecognized tax benefits and employee equity compensation plans.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
The Company has insurance operations in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s, as well as in Brazil and Colombia, primarily through joint ventures. Because these operations are conducted in local currencies other than the U.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the
three
months ended
March 31, 2019
and
2018
, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company’s net income or segment income for the periods reported.
Revenues
Earned Premiums
Earned premiums in the
first
quarter of
2019
increased in all segments and were
$6.86 billion
,
$318 million
or
5%
higher than in the same period of
2018
. The increase in earned premiums in 2019 was reduced by the earned impact of the Company's new Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty entered into effective January 1, 2019. In Business Insurance, earned premiums in the
first
quarter of
2019
increased by
5%
over the same period of
2018
. In Bond & Specialty Insurance, earned premiums in the
first
quarter of
2019
increased by
4%
over the same period of
2018
. In Personal Insurance, earned premiums in the
first
quarter of
2019
increased by
5%
over the same period of
2018
. Factors contributing to the increases in earned premiums in each segment are discussed in more detail in the segment discussions that follow.
Net Investment Income
The following table sets forth information regarding the Company’s investments.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(dollars in millions)
|
|
2019
|
|
2018
|
Average investments
(1)
|
|
$
|
74,040
|
|
|
$
|
72,524
|
|
Pre-tax net investment income
|
|
582
|
|
|
603
|
|
After-tax net investment income
|
|
496
|
|
|
513
|
|
Average pre-tax yield
(2)
|
|
3.1
|
%
|
|
3.3
|
%
|
Average after-tax yield
(2)
|
|
2.7
|
%
|
|
2.8
|
%
|
_________________________________________________________
|
|
(1)
|
Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.
|
|
|
(2)
|
Excludes net realized and net unrealized investment gains and losses.
|
Net investment income in the
first
quarter of
2019
was
$582 million
,
$21 million
or
3%
lower than in the same period of
2018
. Net investment income from fixed maturity investments in the
first
quarter of
2019
was $511 million, $30 million higher than in the same period of
2018
. The increase in the
first
quarter of
2019
primarily resulted from higher long-term reinvestment rates available in the market and a higher average level of fixed maturity investments. Net investment income from short-term securities in the
first
quarter of
2019
was $28 million, $9 million higher than in the same period of
2018
. The increase primarily resulted from higher short-term interest rates. Net investment income generated by the Company's remaining investment portfolios in the
first
quarter of
2019
was $53 million, $60 million lower than in the same period of
2018
, primarily due to lower returns from private equity limited partnerships.
Fee Income
Fee income in the
first
quarter of
2019
was
$109 million
,
$6 million
or
6%
higher than in the same period of 2018. The National Accounts market in Business Insurance is the primary source of the Company’s fee-based business and is discussed in the Business Insurance segment discussion that follows.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Net Realized Investment Gains (Losses)
The following table sets forth information regarding the Company’s net realized investment gains (losses).
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Other-than-temporary impairment losses
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Net realized investment gains (losses) on equity securities still held
|
|
39
|
|
|
(13
|
)
|
Other net realized investment gains, including from sales
|
|
15
|
|
|
2
|
|
Total
|
|
$
|
53
|
|
|
$
|
(11
|
)
|
Other Revenues
Other revenues in the
first
quarters of
2019
and
2018
included installment premium charges and revenues from Simply Business.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the
first
quarter of
2019
were
$4.44 billion
,
$146 million
or
3%
higher than in the same period of
2018
, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends and (iii) lower net favorable prior year reserve development, partially offset by (iv) lower catastrophe losses. Catastrophe losses in the
first
quarter of
2019
primarily resulted from winter storms and wind storms in several regions of the United States. Catastrophe losses in the
first
quarter of
2018
primarily resulted from winter storms in the eastern United States, a wind and hail storm in the southern United States and mudslides in California.
Factors contributing to net favorable prior year reserve development during the
first
quarters of
2019
and
2018
are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
Significant Catastrophe Losses
There were no significant catastrophes incurred during the
three
months ended
March 31, 2019
. The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in the
three
months ended March 31,
2018
, the amount of net unfavorable (favorable) prior year reserve development recognized in the
three
months ended
March 31, 2019
and
2018
for significant catastrophes that occurred in
2018
and 2017, and the estimate of ultimate losses for those catastrophes at
March 31, 2019
and December 31,
2018
. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes. The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for
2019
ranged from approximately $19 million to $30 million of losses before reinsurance and taxes. For the Company’s definition of a catastrophe, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— Consolidated Overview” in the Company’s
2018
Annual Report.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses Incurred/Unfavorable (Favorable)
Prior Year Reserve Development
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Estimated Ultimate Losses
|
(in millions, pre-tax and net of reinsurance)
|
2019
|
|
2018
|
March 31,
2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
PCS Serial Number:
|
|
|
|
|
|
|
|
|
|
|
|
|
22 — Severe wind and hail storms
|
|
(1
|
)
|
|
—
|
|
|
108
|
|
|
109
|
|
32 — Severe wind and hail storms
|
|
—
|
|
|
1
|
|
|
229
|
|
|
229
|
|
43 — Hurricane Harvey
|
|
(11
|
)
|
|
(20
|
)
|
|
219
|
|
|
230
|
|
44 — Hurricane Irma
|
|
(9
|
)
|
|
(11
|
)
|
|
150
|
|
|
159
|
|
48 — California wildfire — Tubbs fire
|
|
3
|
|
|
4
|
|
|
511
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
PCS Serial Number:
|
|
|
|
|
|
|
|
|
|
|
|
|
15 — Winter storm
|
|
—
|
|
|
135
|
|
|
144
|
|
|
144
|
|
17 — Severe wind and hail storms
|
|
(2
|
)
|
|
110
|
|
|
109
|
|
|
111
|
|
33 — Severe wind and hail storms
|
|
(5
|
)
|
|
n/a
|
|
|
112
|
|
|
117
|
|
52 — Hurricane Florence
|
|
(3
|
)
|
|
n/a
|
|
|
103
|
|
|
106
|
|
57 — Hurricane Michael
|
|
3
|
|
|
n/a
|
|
|
161
|
|
|
158
|
|
59 — California wildfire - Camp fire
|
|
(2
|
)
|
|
n/a
|
|
|
332
|
|
|
334
|
|
60 — California wildfire - Woosley fire
|
|
—
|
|
|
n/a
|
|
|
119
|
|
|
119
|
|
_________________________________________________________
n/a: not applicable.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the
first
quarter of
2019
was
$1.12 billion
,
$56 million
or
5%
higher than in the same period of
2018
. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.
General and Administrative Expenses
General and administrative expenses in the
first
quarter of
2019
were
$1.06 billion
, comparable with the same period of
2018
. General and administrative expenses are discussed in more detail in the segment discussions that follow.
Interest Expense
Interest expense in the
first
quarters of
2019
and
2018
was
$88 million
and
$89 million
, respectively.
Income Tax Expense
Income tax expense in the
first
quarter of
2019
was
$171 million
,
$62 million
or
57%
higher than in the same period of
2018
, primarily reflecting the impacts of the
$189 million
increase in income before income taxes in the
first
quarter of
2019
and lower tax expense in the first quarter of
2018
related to unrecognized tax benefits and employee equity compensation plans.
The Company’s effective tax rate was
18%
and
14%
in the
first
quarters of
2019
and
2018
, respectively. The effective tax rates were lower than the statutory rate of 21% in both periods, primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Combined Ratio
The combined ratio of
93.7%
in the
first
quarter of
2019
was
1.8
points lower than the combined ratio of
95.5%
in the same period of
2018
. The loss and loss adjustment expense ratio of
64.0%
in the
first
quarter of
2019
was
0.9
points lower than the loss and loss adjustment expense ratio of
64.9%
in the same period of
2018
. The underwriting expense ratio of
29.7%
for the
first
quarter of
2019
was
0.9
points lower than the underwriting expense ratio of
30.6%
in the same period of
2018
.
Catastrophe losses in the
first
quarters of
2019
and
2018
accounted for
2.8
points and
5.4
points, respectively, of the combined ratio. Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
provided
0.7
points and
2.3
points of benefit, respectively, to the combined ratio. The combined ratio excluding prior year reserve development and catastrophe losses (“underlying combined ratio”) in the
first
quarter of
2019
was
0.8
points lower than the
2018
ratio on the same basis.
Written Premiums
Consolidated gross and net written premiums were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Business Insurance
|
|
$
|
4,730
|
|
|
$
|
4,471
|
|
Bond & Specialty Insurance
|
|
662
|
|
|
638
|
|
Personal Insurance
|
|
2,447
|
|
|
2,309
|
|
Total
|
|
$
|
7,839
|
|
|
$
|
7,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Business Insurance
|
|
$
|
4,163
|
|
|
$
|
3,994
|
|
Bond & Specialty Insurance
|
|
587
|
|
|
574
|
|
Personal Insurance
|
|
2,307
|
|
|
2,256
|
|
Total
|
|
$
|
7,057
|
|
|
$
|
6,824
|
|
Gross and net written premiums in the first quarter of 2019 reflected growth in all segments. Gross written premiums in the
first
quarter of
2019
increased by 6% over the same period of
2018
. Net written premiums increased at a lower rate of 3% in the
first
quarter of
2019
, primarily reflecting ceded written premiums related to the new catastrophe reinsurance treaty. Factors contributing to the increases in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
RESULTS OF OPERATIONS BY SEGMENT
Business Insurance
Results of Business Insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
3,742
|
|
|
$
|
3,568
|
|
Net investment income
|
|
427
|
|
|
446
|
|
Fee income
|
|
104
|
|
|
99
|
|
Other revenues
|
|
43
|
|
|
31
|
|
Total revenues
|
|
4,316
|
|
|
4,144
|
|
|
|
|
|
|
Total claims and expenses
|
|
3,827
|
|
|
3,622
|
|
|
|
|
|
|
Segment income before income taxes
|
|
489
|
|
|
522
|
|
Income tax expense
|
|
75
|
|
|
70
|
|
Segment income
|
|
$
|
414
|
|
|
$
|
452
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
67.6
|
%
|
|
65.7
|
%
|
Underwriting expense ratio
|
|
30.5
|
|
|
31.8
|
|
Combined ratio
|
|
98.1
|
%
|
|
97.5
|
%
|
Overview
Segment income in the
first
quarter of
2019
was
$414 million
,
$38 million
or
8%
lower than segment income of
$452 million
in the same period of
2018
. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) net unfavorable prior year reserve development versus net favorable prior year reserve development in the same period of
2018
and (ii) lower net investment income, partially offset by (iii) lower catastrophe losses and (iv) higher underlying underwriting margins. Catastrophe losses in the
first
quarters of
2019
and
2018
were
$95 million
and
$138 million
, respectively. Net unfavorable prior year reserve development in the
first
quarter of
2019
was
$21 million
, compared with net favorable prior year reserve development of
$66 million
in
2018
. The higher underlying underwriting margins primarily resulted from the impacts of (i) higher business volumes, (ii) lower general and administrative expenses and (iii) lower non-catastrophe weather-related losses, partially offset by (iv) a small number of large losses in the International business, (v) higher loss estimates in the commercial automobile product line consistent with the re-estimates recorded in the fourth quarter of 2018 and (vi) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty. Income tax expense in the
first
quarter of
2019
was higher than in the same period of
2018
, primarily reflecting the impacts of lower tax expense in the first quarter of
2018
related to unrecognized tax benefits and employee equity compensation plans, partially offset by the impact of the decrease in segment income before income taxes in the
first
quarter of
2019
.
Revenues
Earned Premiums
Earned premiums in the
first
quarter of
2019
were
$3.74 billion
,
$174 million
or
5%
higher than in the same period of
2018
. The increase in
2019
primarily reflected the increase in net written premiums over the preceding twelve months. The increase in earned premiums in 2019 was reduced by the earned impact of the new catastrophe reinsurance treaty.
Net Investment Income
Net investment income in the
first
quarter of
2019
was
$427 million
,
$19 million
or
4%
lower than in the same period of
2018
. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the decrease in the Company’s consolidated net investment income in the
first
quarter of
2019
compared
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
with the same period of
2018
. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for a discussion of the Company’s net investment income allocation methodology.
Fee Income
National Accounts is the primary source of fee income due to revenue from its large deductible policies and service businesses, which include risk management, claims administration, loss control and risk management information services provided to third parties, as well as claims and policy management services to workers' compensation residual market pools. Fee income in the
first
quarter of
2019
was
$104 million
,
$5 million
or
5%
higher than in the same period of
2018
. The increase in
2019
reflected higher claim volume under administration associated with its service businesses.
Other Revenues
Other revenues in the
first
quarters of both
2019
and
2018
included installment premium charges and other policyholder service charges, as well as revenues from Simply Business. Other revenues in the
first
quarter of
2019
of
$43 million
increased
$12 million
or
39%
over the same period of
2018
, primarily resulting from Simply Business revenue growth.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the
first
quarter of
2019
were
$2.58 billion
,
$188 million
or
8%
higher than in the same period of
2018
, primarily reflecting the impacts of (i) higher business volumes, (ii) net unfavorable prior year reserve development in the
first
quarter of
2019
, versus net favorable prior year reserve development in the same period of
2018
, (iii) loss cost trends, (iv) a small number of large losses in the International business and (v) higher loss estimates in the commercial automobile product line consistent with the re-estimates recorded in the fourth quarter of 2018, partially offset by (vi) lower catastrophe losses and (vii) lower non-catastrophe weather-related losses.
Factors contributing to net prior year reserve development during the
first
quarters of
2019
and
2018
are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the
first
quarter of
2019
was
$615 million
,
$35 million
or
6%
higher than in the same period of
2018
. The increase in the first quarter of
2019
was generally consistent with the increases in earned premiums.
General and Administrative Expenses
General and administrative expenses in the
first
quarter of
2019
were
$632 million
,
$18 million
or
3%
lower than in the same period of
2018
, primarily reflecting the impacts of (i) a benefit related to a state assessment, partially offset by (ii) expenses related to the expansion of Simply Business.
Income Tax Expense
Income tax expense in the
first
quarter of
2019
was
$75 million
,
$5 million
, or
7%
higher than in the same period of
2018
, primarily reflecting the impacts of (i) lower tax expense in the first quarter of 2018 related to unrecognized tax benefits and employee equity compensation plans, partially offset by (ii) the
$33 million
decrease in segment income before income taxes in the first quarter of 2019.
Combined Ratio
The combined ratio of
98.1%
in the
first
quarter of
2019
was
0.6
points higher than the combined ratio of
97.5%
in the same period of
2018
. The loss and loss adjustment expense ratio of
67.6%
in the
first
quarter of
2019
was
1.9
points higher than the loss and loss adjustment expense ratio of
65.7%
in the same period of
2018
. The underwriting expense ratio of
30.5%
for the
first
quarter of
2019
was
1.3
points lower than the underwriting expense ratio of
31.8%
in the same period of
2018
.
Catastrophe losses in the
first
quarters of
2019
and
2018
accounted for
2.5
points and
3.9
points, respectively, of the combined ratio. Net unfavorable prior year reserve development in the
first
quarter of
2019
accounted for
0.6
points of the combined ratio. Net favorable prior year reserve development in the
first
quarter of
2018
provided
1.9
points of benefit to the combined ratio. The underlying combined ratio in the
first
quarter of
2019
was
0.5
points lower than the
2018
ratio on the same basis, primarily reflecting the impacts of (i) the benefit of lower general and administrative expenses and higher levels of earned premiums on the underwriting expense ratio and (ii) lower non-catastrophe weather-related losses, partially offset by (iii) a small number of large losses in the
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
International business, (iv) higher loss estimates in the commercial automobile product line consistent with the re-estimates recorded in the fourth quarter of 2018 and (v) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty.
Written Premiums
Business Insurance’s gross and net written premiums by market were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Domestic:
|
|
|
|
|
|
|
Select Accounts
|
|
$
|
813
|
|
|
$
|
782
|
|
Middle Market
|
|
2,536
|
|
|
2,359
|
|
National Accounts
|
|
507
|
|
|
521
|
|
National Property and Other
|
|
509
|
|
|
463
|
|
Total Domestic
|
|
4,365
|
|
|
4,125
|
|
International
|
|
365
|
|
|
346
|
|
Total Business Insurance
|
|
$
|
4,730
|
|
|
$
|
4,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Domestic:
|
|
|
|
|
|
|
Select Accounts
|
|
$
|
785
|
|
|
$
|
773
|
|
Middle Market
|
|
2,410
|
|
|
2,262
|
|
National Accounts
|
|
304
|
|
|
309
|
|
National Property and Other
|
|
387
|
|
|
380
|
|
Total Domestic
|
|
3,886
|
|
|
3,724
|
|
International
|
|
277
|
|
|
270
|
|
Total Business Insurance
|
|
$
|
4,163
|
|
|
$
|
3,994
|
|
Gross written premiums in the
first
quarter of
2019
increased by 6% over the same period of
2018
. Net written premiums increased at a lower rate of
4%
in the
first
quarter of
2019
, primarily reflecting the Company's new catastrophe reinsurance treaty.
Select Accounts
. Net written premiums of
$785 million
in the
first
quarter of
2019
increased by
2%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive and were higher than in the same period of
2018
. New business premiums in the
first
quarter of
2019
decreased slightly from the same period of
2018
.
Middle Market.
Net written premiums of
$2.41 billion
in the
first
quarter of
2019
increased by
7%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive and were higher than in the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
National Accounts.
Net written premiums of
$304 million
in the
first
quarter of
2019
decreased by
2%
from the same period of
2018
. Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
were slightly negative, compared to positive in the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
National Property and Other.
Net written premiums of
$387 million
in the
first
quarter of
2019
increased by
2%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive but were lower than in the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
International.
Net written premiums of
$277 million
in the
first
quarter of
2019
increased by
3%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty. The increase in the
first
quarter of
2019
was primarily driven by increases in Canada, partially offset by the impact of changes in foreign currency exchange rates.
Bond & Specialty Insurance
Results of Bond & Specialty Insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
606
|
|
|
$
|
582
|
|
Net investment income
|
|
56
|
|
|
58
|
|
Other revenues
|
|
6
|
|
|
6
|
|
Total revenues
|
|
668
|
|
|
646
|
|
|
|
|
|
|
Total claims and expenses
|
|
495
|
|
|
438
|
|
|
|
|
|
|
Segment income before income taxes
|
|
173
|
|
|
208
|
|
Income tax expense
|
|
35
|
|
|
35
|
|
Segment income
|
|
$
|
138
|
|
|
$
|
173
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
43.5
|
%
|
|
36.6
|
%
|
Underwriting expense ratio
|
|
37.6
|
|
|
38.1
|
|
Combined ratio
|
|
81.1
|
%
|
|
74.7
|
%
|
Overview
Segment income in the
first
quarter of
2019
was
$138 million
,
$35 million
or
20%
lower than segment income of
$173 million
in the same period of
2018
. The decrease in segment income before income taxes primarily reflected the pre-tax impact of lower net favorable prior year reserve development. Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
was
$3 million
and
$35 million
, respectively. Catastrophe losses in the
first
quarters of
2019
and
2018
were
$3 million
and
$0
, respectively. Income tax expense in the
first
quarter of
2019
was level with the same period of
2018
, primarily reflecting the impacts of lower tax expense in the first quarter of 2018 related to unrecognized tax benefits and employee equity compensation plans, largely offset by the impact of the decrease in segment income before income taxes in the first quarter of 2019.
Revenues
Earned Premiums
Earned premiums in the
first
quarter of
2019
were
$606 million
,
$24 million
or
4%
higher than in the same period of
2018
. The increase in
2019
primarily reflected the increase in net written premiums over the preceding twelve months.
Net Investment Income
Net investment income in the
first
quarter of
2019
was
$56 million
,
$2 million
or
3%
lower than in the same period of
2018
. Included in Bond & Specialty Insurance are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the “Net Investment Income” section of “Consolidated Results of Operations” herein for a discussion of the decrease in the Company’s consolidated net investment
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
income in the
first
quarter of
2019
compared with the same period of
2018
. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s
2018
Annual Report for a discussion of the Company’s net investment income allocation methodology.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the
first
quarter of
2019
were
$266 million
,
$50 million
or
23%
higher than in the same period of
2018
, primarily reflecting the impacts of (i) lower net favorable prior year reserve development and (ii) higher business volumes.
Factors contributing to net favorable prior year reserve development during the
first
quarter of
2018
are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the
first
quarter of
2019
was
$112 million
,
$5 million
or
5%
higher than in the same period of
2018
. The increase in
2019
was generally consistent with the increase in earned premiums.
General and Administrative Expenses
General and administrative expenses in the
first
quarter of
2019
were
$117 million
,
$2
million or
2%
higher than in the same period of
2018
, primarily reflecting the impact of higher business volumes.
Income Tax Expense
Income tax expense in the
first
quarter of
2019
was
$35 million
, level with the same period of
2018
, primarily reflecting the impacts of lower tax expense in the first quarter of 2018 related to unrecognized tax benefits and employee equity compensation plans, largely offset by the impact of the
$35 million
decrease in segment income before income taxes in the first quarter of 2019.
Combined Ratio
The combined ratio of
81.1%
in the
first
quarter of
2019
was
6.4
points higher than the combined ratio of
74.7%
in the same period of
2018
. The loss and loss adjustment expense ratio of
43.5%
in the
first
quarter of
2019
was
6.9
points higher than the loss and loss adjustment expense ratio of
36.6%
in the same period of
2018
. The underwriting expense ratio of
37.6%
in the
first
quarter of
2019
was
0.5
points lower than the underwriting expense ratio of
38.1%
in the same period of
2018
.
Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
provided
0.5
points and
6.0
points of benefit, respectively, to the combined ratio. Catastrophe losses in the
first
quarters of
2019
and
2018
accounted for
0.5
points and
0.0
points, respectively, of the combined ratio. The underlying combined ratio in the
first
quarter of
2019
was
0.4
points higher than the
2018
ratio on the same basis.
Written Premiums
The Bond & Specialty Insurance segment’s gross and net written premiums were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
Management Liability
|
|
$
|
389
|
|
|
$
|
364
|
|
Surety
|
|
222
|
|
|
218
|
|
Total Domestic
|
|
611
|
|
|
582
|
|
International
|
|
51
|
|
|
56
|
|
Total Bond & Specialty Insurance
|
|
$
|
662
|
|
|
$
|
638
|
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
Management Liability
|
|
$
|
367
|
|
|
$
|
348
|
|
Surety
|
|
184
|
|
|
185
|
|
Total Domestic
|
|
551
|
|
|
533
|
|
International
|
|
36
|
|
|
41
|
|
Total Bond & Specialty Insurance
|
|
$
|
587
|
|
|
$
|
574
|
|
Gross written premiums in the
first
quarter of
2019
increased by 4% over the same period of
2018
. Net written premiums increased at a lower rate of
2%
in the first quarter of 2019, reflecting higher ceded written premiums for several reinsurance treaties, including those related to the new catastrophe reinsurance treaty.
Domestic.
Net written premiums of
$551 million
in the
first
quarter of
2019
increased by
3%
over the same period of
2018
. Excluding the surety line of business, for which the following are not relevant measures, business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive and were comparable with the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
International.
Net written premiums of
$36 million
in the
first
quarter of
2019
decreased by
12%
from the same period of
2018
. The decrease in the
first
quarter of
2019
was primarily driven by decreases in the United Kingdom and the impact of changes in foreign currency exchange rates.
Personal Insurance
Results of Personal Insurance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(dollars in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Earned premiums
|
|
$
|
2,507
|
|
|
$
|
2,387
|
|
Net investment income
|
|
99
|
|
|
99
|
|
Fee income
|
|
5
|
|
|
4
|
|
Other revenues
|
|
22
|
|
|
17
|
|
Total revenues
|
|
2,633
|
|
|
2,507
|
|
|
|
|
|
|
Total claims and expenses
|
|
2,286
|
|
|
2,350
|
|
|
|
|
|
|
Segment income before income taxes
|
|
347
|
|
|
157
|
|
Income tax expense
|
|
69
|
|
|
28
|
|
Segment income
|
|
$
|
278
|
|
|
$
|
129
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
63.7
|
%
|
|
70.7
|
%
|
Underwriting expense ratio
|
|
26.4
|
|
|
26.8
|
|
Combined ratio
|
|
90.1
|
%
|
|
97.5
|
%
|
Overview
Segment income in the
first
quarter of
2019
was
$278 million
,
$149 million
or
116%
higher than segment income of
$129 million
in the same period of
2018
. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses, (ii) higher underlying underwriting margins and (iii) higher net favorable prior year reserve development.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Catastrophe losses in the
first
quarters of
2019
and
2018
were
$95 million
and
$216 million
, respectively. Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
was
$69 million
and
$49 million
, respectively. The higher underlying underwriting margins primarily resulted from the impacts of (i) earned pricing that exceeded loss cost trends in Agency Automobile and (ii) higher business volumes, partially offset by (iii) the impact on earned premiums related to the Company's new catastrophe reinsurance treaty, mostly impacting Agency Homeowners and Other. Income tax expense in the
first
quarter of
2019
was higher than in the same period of
2018
, primarily reflecting the impact of the increase in the segment income before income taxes.
Revenues
Earned Premiums
Earned premiums in the
first
quarter of
2019
were
$2.51 billion
,
$120 million
or
5%
higher than in the same period of
2018
. The increase in
2019
primarily reflected the increase in net written premiums over the preceding twelve months. The increase in earned premiums in 2019 was reduced by the earned impact of the new catastrophe reinsurance treaty.
Net Investment Income
Net investment income in the
first
quarter of
2019
was
$99 million
, level with the same period of
2018
. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the decrease in the Company’s consolidated net investment income in the
first
quarter of
2019
compared with the same period of
2018
. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s
2018
Annual Report for a discussion of the Company’s net investment income allocation methodology.
Other Revenues
Other revenues in the
first
quarters of
2019
and
2018
primarily consisted of installment premium charges.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in the
first
quarter of
2019
were
$1.60 billion
,
$92 million
or
5%
lower than in the same period of
2018
, primarily reflecting the impacts of (i) lower catastrophe losses and (ii) higher net favorable prior year reserve development, partially offset by (iii) higher business volumes and (iv) loss cost trends.
Factors contributing to net favorable prior year reserve development during the
first
quarters of
2019
and
2018
are discussed in more detail in note 6 of notes to the unaudited consolidated financial statements.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in the
first
quarter of
2019
was
$390 million
,
$16 million
or
4%
higher than in the same period of
2018
. The increase was generally consistent with the increase in earned premiums.
General and Administrative Expenses
General and administrative expenses in the
first
quarter of
2019
were
$300 million
,
$12 million
or
4%
higher than in the same period of
2018
, primarily reflecting the impact of higher business volumes.
Income Tax Expense
Income tax expense in the
first
quarter of
2019
was
$69 million
,
$41 million
or
146%
higher than in the same period of
2018
, primarily reflecting the impact of the
$190 million
increase in segment income before income taxes.
Combined Ratio
The combined ratio of
90.1%
in the
first
quarter of
2019
was
7.4
points lower than the combined ratio of
97.5%
in the same period of
2018
. The loss and loss adjustment expense ratio of
63.7%
in the
first
quarter of
2019
was
7.0
points lower than the loss and loss adjustment expense ratio of
70.7%
in the same period of
2018
. The underwriting expense ratio of
26.4%
for the
first
quarter of
2019
was
0.4
points lower than the underwriting expense ratio of
26.8%
in the same period of
2018
.
Catastrophe losses in the
first
quarters of
2019
and
2018
accounted for
3.8
points and
9.0
points, respectively, of the combined ratio. Net favorable prior year reserve development in the
first
quarters of
2019
and
2018
provided
2.8
points and
2.0
points of benefit, respectively, to the combined ratio. The underlying combined ratio in the
first
quarter of
2019
was
1.4
points lower than
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
the
2018
ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends in Agency Automobile, partially offset by (ii) the impact on earned premiums related to the new catastrophe reinsurance treaty, mostly impacting Agency Homeowners and Other.
Written Premiums
Personal Insurance’s gross and net written premiums were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
Automobile
|
|
$
|
1,240
|
|
|
$
|
1,192
|
|
Homeowners and Other
|
|
954
|
|
|
873
|
|
Total Agency
|
|
2,194
|
|
|
2,065
|
|
Direct-to-Consumer
|
|
98
|
|
|
93
|
|
Total Domestic
|
|
2,292
|
|
|
2,158
|
|
International
|
|
155
|
|
|
151
|
|
Total Personal Insurance
|
|
$
|
2,447
|
|
|
$
|
2,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
Agency:
|
|
|
|
|
|
|
Automobile
|
|
$
|
1,224
|
|
|
$
|
1,183
|
|
Homeowners and Other
|
|
837
|
|
|
832
|
|
Total Agency
|
|
2,061
|
|
|
2,015
|
|
Direct-to-Consumer
|
|
95
|
|
|
92
|
|
Total Domestic
|
|
2,156
|
|
|
2,107
|
|
International
|
|
151
|
|
|
149
|
|
Total Personal Insurance
|
|
$
|
2,307
|
|
|
$
|
2,256
|
|
Domestic Agency Written Premiums
Personal Insurance’s domestic Agency business comprises business written through agents, brokers and other intermediaries.
Domestic Agency gross written premiums in the
first
quarter of
2019
increased by 6% over the same period of
2018
. Domestic Agency net written premiums increased at a lower rate of
2%
in the
first
quarter of
2019
, primarily reflecting the new catastrophe reinsurance treaty.
Domestic Agency Automobile net written premiums of
$1.22 billion
in the
first
quarter of
2019
increased by
3%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty. Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive but were lower than in the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
Domestic Agency Homeowners and Other net written premiums of
$837 million
in the
first
quarter of
2019
increased by
1%
over the same period of
2018
. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Business retention rates remained strong in the
first
quarter of
2019
. Renewal premium changes in the
first
quarter of
2019
remained positive and were higher than in the same period of
2018
. New business premiums in the
first
quarter of
2019
increased over the same period of
2018
.
For its Domestic Agency business, the Personal Insurance segment had approximately 7.2 million and 7.0 million active policies at
March 31,
2019
and
2018
, respectively.
Direct-to-Consumer and International Written Premiums
Direct-to-Consumer net written premiums of
$95 million
in the
first
quarter of
2019
increased by
3%
over the same period of
2018
, primarily reflecting growth in both automobile and homeowners and other. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty.
International net written premiums of
$151 million
in the
first
quarter of
2019
increased by
1%
over the same period of
2018
. The increase was primarily driven by growth in automobile net written premiums, partially offset by the impact of changes in foreign currency exchange rates. Net written premiums in the
first
quarter of
2019
were reduced by the new catastrophe reinsurance treaty.
For its international and direct-to-consumer business, Personal Insurance had approximately 902,000 and 883,000 active policies at
March 31,
2019
and
2018
, respectively.
Interest Expense and Other
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions)
|
|
2019
|
|
2018
|
Income (loss)
|
|
$
|
(75
|
)
|
|
$
|
(76
|
)
|
The Income (loss) for Interest Expense and Other in the
first
quarters of
2019
and
2018
was
$(75) million
and
$(76) million
, respectively. Pre-tax interest expense in the
first
quarters of
2019
and
2018
was
$88 million
and
$89 million
respectively. After-tax interest expense in the
first
quarters of both
2019
and
2018
was
$70 million
.
ASBESTOS CLAIMS AND LITIGATION
The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims. Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the focus by plaintiffs on defendants who were not traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Company’s asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.
The Company continues to be involved in disputes, including litigation, with a number of policyholders, some of whom are in bankruptcy over coverage for asbestos-related claims. Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company, but which could result in settlements for larger amounts than originally anticipated. Although the Company has seen a reduction in the overall risk associated with these disputes, it remains difficult to predict the ultimate cost of these claims. As in the past, the Company will continue to pursue settlement opportunities.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers’ conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions.
Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually. Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.
The Company’s quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders in the home office and field office category and the assumed reinsurance and other category as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company’s overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company’s overall view of the current underlying
asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.
Net asbestos paid loss and loss expenses in the first
three
months of
2019
and
2018
were $38 million and $33 million, respectively. Net asbestos reserves were $1.24 billion at
March 31, 2019
, compared with $1.25 billion at
March 31, 2018
.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
The following table displays activity for asbestos losses and loss expenses and reserves:
|
|
|
|
|
|
|
|
|
|
(at and for the three months ended March 31, in millions)
|
|
2019
|
|
2018
|
Beginning reserves:
|
|
|
|
|
|
|
Gross
|
|
$
|
1,608
|
|
|
$
|
1,538
|
|
Ceded
|
|
(327
|
)
|
|
(257
|
)
|
Net
|
|
1,281
|
|
|
1,281
|
|
|
|
|
|
|
Incurred losses and loss expenses:
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
—
|
|
Ceded
|
|
—
|
|
|
—
|
|
Net
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Paid loss and loss expenses:
|
|
|
|
|
|
|
Gross
|
|
44
|
|
|
56
|
|
Ceded
|
|
(6
|
)
|
|
(23
|
)
|
Net
|
|
38
|
|
|
33
|
|
|
|
|
|
|
Foreign exchange and other:
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
1
|
|
Ceded
|
|
—
|
|
|
—
|
|
Net
|
|
—
|
|
|
1
|
|
|
|
|
|
|
Ending reserves:
|
|
|
|
|
|
|
Gross
|
|
1,564
|
|
|
1,483
|
|
Ceded
|
|
(321
|
)
|
|
(234
|
)
|
Net
|
|
$
|
1,243
|
|
|
$
|
1,249
|
|
_________________________________________________________
See “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”
ENVIRONMENTAL CLAIMS AND LITIGATION
The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties.
The Company has also been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1980s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims, when submitted, rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.
The resolution of environmental exposures by the Company generally occurs through settlements with policyholders as opposed to claimants. Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a “buy-back” of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including, but not limited to, asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which only extinguish any liability arising from known specified sites or claims. In many instances, these agreements also include indemnities and hold harmless provisions to protect the Company. The Company’s general purpose in executing these agreements
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
is to reduce the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.
In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. Conventional actuarial methods are not used to estimate these reserves.
The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions.
Net environmental paid loss and loss expenses in the first
three
months of
2019
and
2018
were $20 million and $13 million, respectively. At
March 31, 2019
, approximately 94% of the net environmental reserve (approximately $295 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. The balance, approximately 6% of the net environmental reserve (approximately $19 million), consists of case reserves.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
The following table displays activity for environmental losses and loss expenses and reserves:
|
|
|
|
|
|
|
|
|
|
(at and for the three months ended March 31, in millions)
|
|
2019
|
|
2018
|
Beginning reserves:
|
|
|
|
|
|
|
Gross
|
|
$
|
358
|
|
|
$
|
373
|
|
Ceded
|
|
(24
|
)
|
|
(13
|
)
|
Net
|
|
334
|
|
|
360
|
|
|
|
|
|
|
Incurred losses and loss expenses:
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
—
|
|
Ceded
|
|
—
|
|
|
—
|
|
Net
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Paid loss and loss expenses:
|
|
|
|
|
|
|
Gross
|
|
20
|
|
|
17
|
|
Ceded
|
|
—
|
|
|
(4
|
)
|
Net
|
|
20
|
|
|
13
|
|
|
|
|
|
|
Foreign exchange and other:
|
|
|
|
|
|
|
Gross
|
|
—
|
|
|
—
|
|
Ceded
|
|
—
|
|
|
—
|
|
Net
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Ending reserves:
|
|
|
|
|
|
|
Gross
|
|
338
|
|
|
356
|
|
Ceded
|
|
(24
|
)
|
|
(9
|
)
|
Net
|
|
$
|
314
|
|
|
$
|
347
|
|
UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. Changes in the legal, regulatory and legislative environment may impact the resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. Changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims could affect the settlement of asbestos and environmental claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves. In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
INVESTMENT PORTFOLIO
The Company’s invested assets at
March 31, 2019
were
$74.52 billion
, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The carrying value of the Company’s fixed maturity portfolio at
March 31, 2019
was
$65.50 billion
. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both
March 31, 2019
and
December 31, 2018
. Below investment grade securities represented 2.4% and 2.3% of the total fixed maturity investment portfolio at
March 31, 2019
and
December 31, 2018
, respectively. The weighted average effective duration of fixed maturities and short-term securities was 4.4 (4.6 excluding short-term securities) at
March 31, 2019
and 4.5 (4.7 excluding short-term securities) at
December 31, 2018
.
Obligations of States, Municipalities and Political Subdivisions
The Company’s fixed maturity investment portfolio at
March 31, 2019
and
December 31, 2018
included
$29.35 billion
and
$28.61 billion
, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at
March 31, 2019
and
December 31, 2018
were
$2.59 billion
and
$2.85 billion
, respectively, of pre-refunded bonds, which are bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee. All of the Company’s holdings of securities issued by Puerto Rico and related entities have been pre-refunded and therefore are defeased by U.S. Treasury securities.
The Company bases its investment decision on the underlying credit characteristics of the municipal security. The weighted average credit rating of the municipal bond portfolio was "Aaa/Aa1" at both
March 31, 2019
and
December 31, 2018
.
Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities
The Company’s fixed maturity investment portfolio at
March 31, 2019
and
December 31, 2018
included
$2.65 billion
and
$2.57 billion
, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company’s investment strategy generally favors securities that reduce this risk within expected interest rate ranges. Included in the totals at
March 31, 2019
and
December 31, 2018
were $942 million and $859 million, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.71 billion at both
March 31, 2019
and
December 31, 2018
. Approximately 51% and 52% of the Company’s CMO holdings at
March 31, 2019
and
December 31, 2018
, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The weighted average credit rating of the $843 million and $828 million of non-guaranteed CMO holdings at both
March 31, 2019
and
December 31, 2018
was "Aa1." The weighted average credit rating of all of the above securities was "Aaa/Aa1" at both
March 31, 2019
and
December 31, 2018
. For further discussion regarding the Company’s investments in residential CMOs, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Portfolio” in the Company’s 2018 Annual Report.
Equity Securities, Real Estate and Short-Term Investments
See note 1 of notes to the consolidated financial statements in the Company’s 2018 Annual Report for further information about these invested asset classes.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Other Investments
The Company also invests in private equity limited partnerships, hedge funds and real estate partnerships and joint ventures. Also included in other investments are non-public common and preferred equities and derivatives. These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility. At
March 31, 2019
and
December 31, 2018
, the carrying value of the Company’s other investments was
$3.55 billion
and
$3.56 billion
, respectively.
REINSURANCE RECOVERABLES
For a description of the Company’s reinsurance recoverables, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance Recoverables” in the Company’s 2018 Annual Report.
The following table summarizes the composition of the Company’s reinsurance recoverables:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31,
2019
|
|
December 31, 2018
|
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses
|
|
$
|
3,427
|
|
|
$
|
3,485
|
|
Allowance for uncollectible reinsurance
|
|
(109
|
)
|
|
(110
|
)
|
Net reinsurance recoverables
|
|
3,318
|
|
|
3,375
|
|
Mandatory pools and associations
|
|
1,993
|
|
|
2,005
|
|
Structured settlements
|
|
2,970
|
|
|
2,990
|
|
Total reinsurance recoverables
|
|
$
|
8,281
|
|
|
$
|
8,370
|
|
Net reinsurance recoverables at
March 31, 2019
decreased by $57 million from
December 31, 2018
, primarily reflecting the impacts of cash collections in the first
three
months of
2019
.
OUTLOOK
The following discussion provides outlook information for certain key drivers of the Company’s results of operations and capital position.
Premiums.
The Company’s earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the life of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations. Property and casualty insurance market conditions are expected to remain competitive. Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.
Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards during the remainder of 2019. In Business Insurance, the Company expects that domestic renewal premium changes during the remainder of 2019 will remain positive and will be slightly higher than the levels attained in the same period of 2018. In Bond & Specialty Insurance, the Company expects that renewal premium changes with respect to domestic management liability business during the remainder of 2019 will remain positive and will be broadly consistent with the levels attained in the same period of 2018. In Personal Insurance, the Company expects that domestic Agency Automobile renewal premium changes during the remainder of 2019 will remain positive but will be lower than the levels attained in the same period of 2018. The Company expects that domestic Agency Homeowners and Other renewal premium changes during the remainder of 2019 will remain positive and will be higher than the levels attained in the same period of 2018. The need for state regulatory approval for changes to personal and many commercial property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes. With regard to the Company's international business, the Company expects that renewal premium changes during the remainder of 2019 in aggregate will remain positive and will be higher than the levels attained in the same period of 2018. Given the relatively smaller amount of premium
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
that the Company generates from outside the United States and the transactional nature of some of those markets, particularly Lloyd’s, international renewal premium changes in each segment can be more volatile and therefore difficult to predict.
Property and casualty insurance market conditions are expected to remain competitive during the remainder of 2019 for new business. In each of the Company’s business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time.
Economic conditions in the United States and elsewhere could change, due to a variety of factors, including the political and regulatory environment, changes to fiscal stimulus programs, inflation or deflation (including the impact of rapid changes in wages and/or commodity prices), the imposition of tariffs or other barriers to international trade, fluctuations in interest rates and foreign currency exchange rates, high levels of global debt after an extended period of low interest rates, the United Kingdom’s withdrawal from the European Union, a shutdown of the U.S. government, the failure by the U.S. government to raise the debt ceiling, changes to the U.S. Federal budget and further potential changes in tax laws in the United States or modification of the Affordable Care Act. The resulting changes in levels of economic activity could positively or negatively impact exposure changes at renewal and the Company’s ability to write business at acceptable rates. Additionally, changes in levels of economic activity could positively or negatively impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could positively or negatively impact net written premiums during the remainder of 2019, and because earned premiums are a function of net written premiums, earned premiums could be impacted on a lagging basis.
Underwriting Gain/Loss
. The Company’s underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins. Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss activity; changes in current period loss estimates resulting from prior period loss development; changes in business mix; changes in reinsurance coverages and/or costs; premium adjustments; and variability in expenses and assessments.
Catastrophe losses and non-catastrophe weather-related losses are inherently unpredictable from period to period. The Company’s results of operations could be adversely impacted if significant catastrophe and non-catastrophe weather-related losses were to occur.
For a number of years, the Company’s results have included significant amounts of net favorable prior year reserve development driven by better than expected loss experience. However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development in future periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.
It is possible that changes in economic conditions could lead to higher or lower inflation than the Company had anticipated, which could in turn lead to an increase or decrease in the Company’s loss costs and the need to strengthen or reduce claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that require a relatively longer period of time to finalize and settle claims for a given accident year and, accordingly, are relatively more inflation sensitive. For a further discussion, see “Part I-Item 1A-Risk Factors-If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, our financial results could be materially and adversely affected” in the Company’s 2018 Annual Report.
In Business Insurance, the Company expects underlying underwriting margins during the remainder of 2019 in aggregate will be higher than in the same period of 2018, and the underlying combined ratio during the remainder of 2019 in aggregate will be lower than in the same period of 2018, assuming loss activity, primarily large losses, returns to lower and more normal levels.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
In Bond & Specialty Insurance, the Company expects that underlying underwriting margins and the underlying combined ratio during the remainder of 2019 in aggregate will be broadly consistent with the same period of 2018.
In Personal Insurance, the Company expects underlying underwriting margins during the remainder of 2019 in aggregate will be higher than in the same period of 2018, and the underlying combined ratio during the remainder of 2019 in aggregate will be lower than in the same period of 2018. In Agency Automobile, the Company expects underlying underwriting margins during the remainder of 2019 in aggregate will be lower than in the same period of 2018, and the underlying combined ratio during the remainder of 2019 in aggregate will be higher than in the same period of 2018. In Agency Homeowners and Other, the Company expects underlying underwriting margins during the remainder of 2019 in aggregate will be higher than in the same period of 2018, and the underlying combined ratio during the remainder of 2019 in aggregate will be lower than in the same period of 2018, assuming non-catastrophe weather-related losses and non-weather related losses return to lower and more normal levels. In all cases, the expected aggregate variances to the prior year period will be driven by results in the second half of 2019 as compared to the same period of 2018.
Investment Portfolio
. The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration. The weighted average effective duration of fixed maturities and short-term securities was 4.4 (4.6 excluding short-term securities) at
March 31, 2019
. From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At
March 31, 2019
, the Company had no open U.S. Treasury futures contracts. The Company continually evaluates its investment alternatives and mix. Currently, the majority of the Company’s investments are comprised of a widely diversified portfolio of high-quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures. These investment classes have the potential for higher returns but also the potential for higher degrees of risk, including less stable rates of return and less liquidity.
Net investment income is a material contributor to the Company’s results of operations. Based on the impacts of (i) slightly higher levels of fixed income investments (fixed maturity and short-term investments) and (ii) slightly higher embedded yields on the fixed income portfolio, the Company expects that during the remainder of 2019, after-tax net investment income from those portfolios will be approximately $20 million higher on a quarterly basis as compared to the corresponding quarters of 2018. The impact of future market conditions on net investment income from the Company's remaining investment portfolios during the remainder of 2019 is hard to predict. If general economic conditions and/or investment market conditions change, the Company could experience an increase or decrease in net investment income and/or significant realized investment gains or losses (including impairments) compared with same period of 2018.
The Company had a net pre-tax unrealized investment gain of $1.28 billion ($1.01 billion after-tax) in its fixed maturity investment portfolio at
March 31, 2019
. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders’ equity, and a declining interest rate environment would have the opposite effects. The Company's investment portfolio has benefited from certain tax exemptions (primarily those related to interest from municipal bonds) and certain other tax laws, including, but not limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits). Changes in these laws could adversely impact the value of the Company's investment portfolio. See "Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact us" included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report.
For further discussion of the Company’s investment portfolio, see “Investment Portfolio.” For a discussion of the risks to the Company’s business during or following a financial market disruption and risks to the Company’s investment portfolio, see the risk factors entitled “During or following a period of financial market disruption or an economic downturn, our business could be materially and adversely affected” and “Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses” included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report. For a discussion of the risks to the Company’s investments from foreign currency exchange rate fluctuations, see the risk factor entitled “We are also subject to a number of additional risks associated with our business outside the United States” included in “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report and see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Rate Risk” in the Company’s 2018 Annual Report.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Capital Position.
The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. In addition, the timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, changes in levels of written premiums, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. For information regarding the Company’s common share repurchases in 2019, see “Liquidity and Capital Resources.”
As a result of the Company’s business outside of the United States, primarily in Canada, the United Kingdom (including Lloyd’s), the Republic of Ireland and Brazil, the Company’s capital is also subject to the effects of changes in foreign currency exchange rates (including with respect to the valuation of the Company's foreign investments and interests in joint ventures). For example, strengthening of the U.S. dollar in comparison to other currencies could result in a reduction of shareholders’ equity. For additional discussion of the Company’s foreign exchange market risk exposure, see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2018 Annual Report.
Many of the statements in this “Outlook” section are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them. See “—Forward Looking Statements.” For a discussion of potential risks and uncertainties that could impact the Company’s results of operations or financial position, see “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report and “Critical Accounting Estimates.”
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed.
Operating Company Liquidity.
The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities. For further discussion of operating company liquidity, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Company’s 2018 Annual Report.
Holding Company Liquidity
. TRV’s liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan. At
March 31, 2019
, TRV held total cash and short-term invested assets in the United States aggregating
$1.92 billion
and having a weighted average maturity of 51 days. TRV has established a holding company liquidity target equal to its estimated annual pre-tax interest expense and common shareholder dividends (currently approximately $1.18 billion). TRV’s holding company liquidity of
$1.92 billion
at
March 31, 2019
exceeded this target and it is the opinion of the Company’s management that these assets are sufficient to meet TRV’s current liquidity requirements.
TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company’s foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company’s financial position or liquidity at
March 31, 2019
.
TRV has a shelf registration statement filed with the Securities and Exchange Commission (SEC) that expires on June 17, 2019 which permits it to issue securities from time to time. The Company intends to file a new shelf registration statement in the second quarter of 2019. TRV also has a $1.0 billion line of credit facility with a syndicate of financial institutions that expires on June 4, 2023. At
March 31, 2019
, the Company had $100 million of commercial paper outstanding. TRV is not reliant on its commercial paper program to meet its operating cash flow needs.
The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $341 million to provide a portion of the capital needed to support its obligations at Lloyd’s at
March 31, 2019
. If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
have to seek alternative means of supporting its obligations at Lloyd’s, which could include utilizing holding company funds on hand.
Operating Activities
Net cash provided by operating activities in the first
three
months of
2019
and
2018
was
$639 million
and
$554 million
, respectively. The increase in cash flows in the first
three
months of
2019
primarily reflected (i) higher levels of collected premiums and (ii) lower income tax payments, partially offset by the impacts of higher levels of payments for (iii) claims and claim adjustment expenses and (iv) commission expenses.
Investing Activities
Net cash used in investing activities in the first
three
months of
2019
and
2018
was
$586 million
and
$381 million
, respectively. The Company’s consolidated total investments at
March 31, 2019
increased by $2.24 billion, or 3% over year-end
2018
, primarily reflecting the impacts of (i) net unrealized gains on investments at March 31, 2019 as compared with net unrealized losses on investments at December 31, 2018, as a result of decreases in market interest rates during the first quarter of 2019 and (ii) net cash flows provided by operating activities, partially offset by (iii) common share repurchases and (iv) dividends paid to shareholders.
Financing Activities
Net cash used in financing activities in the first
three
months of
2019
and
2018
was
$71 million
and
$122 million
, respectively. The totals in both periods primarily reflected common share repurchases and dividends paid to shareholders, partially offset by the issuance of debt and the net proceeds from employee stock option exercises. The total in the first quarter of 2018 also included the payment of debt. Common share repurchases in the first
three
months of
2019
and
2018
were
$421 million
and
$401 million
, respectively.
Dividends
. Dividends paid to shareholders were
$205 million
and
$197 million
in the first
three
months of
2019
and
2018
, respectively. The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s financial position, earnings, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints and other factors as the Board of Directors deems relevant. Dividends will be paid by the Company only if declared by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. On
April 18, 2019
, the Company announced that it would increase its regular quarterly dividend from $0.77 per share to $0.82 per share, a 6.5% increase. The increased dividend is payable June 28, 2019 to shareholders of record on June 10, 2019.
Share Repurchase Authorization
. The Company’s Board of Directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. During the three months ended
March 31, 2019
, the Company repurchased
2.9 million
shares under its share repurchase authorization, for a total cost of
$375 million
. The average cost per share repurchased was
$129.42
. At
March 31, 2019
, the Company had
$2.91 billion
of capacity remaining under the share repurchase authorization.
Capital Structure
. The following table summarizes the components of the Company’s capital structure at
March 31, 2019
and
December 31, 2018
.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
March 31,
2019
|
|
December 31,
2018
|
Debt:
|
|
|
|
|
|
Short-term
|
|
$
|
600
|
|
|
$
|
600
|
|
Long-term
|
|
6,504
|
|
|
6,004
|
|
Net unamortized fair value adjustments and debt issuance costs
|
|
(47
|
)
|
|
(40
|
)
|
Total debt
|
|
7,057
|
|
|
6,564
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Common stock and retained earnings, less treasury stock
|
|
25,022
|
|
|
24,753
|
|
Accumulated other comprehensive loss
|
|
(682
|
)
|
|
(1,859
|
)
|
Total shareholders’ equity
|
|
24,340
|
|
|
22,894
|
|
Total capitalization
|
|
$
|
31,397
|
|
|
$
|
29,458
|
|
On March 4, 2019, the Company issued $500 million aggregate principal amount of 4.10% senior notes that will mature on March 4, 2049. See note 8 of notes to the unaudited consolidated financial statements for further discussion regarding the terms of the senior notes.
The following table provides a reconciliation of total capitalization presented in the foregoing table to total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity.
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
March 31,
2019
|
|
December 31,
2018
|
Total capitalization
|
|
$
|
31,397
|
|
|
$
|
29,458
|
|
Less: net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
|
|
1,007
|
|
|
(113
|
)
|
Total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
|
|
$
|
30,390
|
|
|
$
|
29,571
|
|
Debt-to-total capital ratio
|
|
22.5
|
%
|
|
22.3
|
%
|
Debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
|
|
23.2
|
%
|
|
22.2
|
%
|
The debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders’ equity, is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes, included in shareholders’ equity. Net unrealized gains and losses on investments can be significantly impacted by both interest rate movements and other economic factors. Accordingly, in the opinion of the Company’s management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company’s financial leverage position. The Company’s ratio of debt-to-total capital excluding after-tax net unrealized investment gains (losses) included in shareholders’ equity of 23.2% at
March 31, 2019
was within the Company’s target range of 15% to 25%.
RATINGS
Ratings are an important factor in assessing the Company’s competitive position in the insurance industry. The Company receives ratings from the following major rating agencies: A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s (S&P). The following rating agency actions were taken with respect to the Company since February 14, 2019, the date on which the Company’s 2018 Annual Report was filed with the SEC. For additional discussion of ratings, see “Part I—Item 1—Business—Ratings” in the Company’s 2018 Annual Report.
|
|
•
|
On February 28, 2019, A.M. Best assigned a financial strength rating of "A++" to the Company's newly established insurance subsidiary in the Republic of Ireland, Travelers Insurance Designated Activity Company. The outlook for this rating is stable.
|
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CRITICAL ACCOUNTING ESTIMATES
For a description of the Company’s critical accounting estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in the Company’s 2018 Annual Report. The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, investment valuation and impairments, and goodwill and other intangible assets impairments. Except as shown in the table below, there have been no material changes to the Company’s critical accounting estimates since
December 31, 2018
.
Claims and Claim Adjustment Expense Reserves
The table below displays the Company’s gross claims and claim adjustment expense reserves by product line. Because the establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates, currently established claims and claim adjustment expense reserves may change. The Company reflects adjustments to the reserves in the results of operations in the period the estimates are changed. These changes in estimates could result in income statement charges that could be material to the Company’s operating results in future periods. In particular, a portion of the Company’s gross claims and claim adjustment expense reserves (totaling $1.90 billion at
March 31, 2019
) are for asbestos and environmental claims and related litigation. Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the summary table below. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current reserves by an amount that could be material to the Company’s future operating results. Asbestos and environmental reserves are discussed separately; see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves” in this report.
Gross claims and claim adjustment expense reserves by product line were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
(in millions)
|
|
Case
|
|
IBNR
|
|
Total
|
|
Case
|
|
IBNR
|
|
Total
|
General liability
|
|
$
|
4,794
|
|
|
$
|
7,039
|
|
|
$
|
11,833
|
|
|
$
|
4,780
|
|
|
$
|
7,092
|
|
|
$
|
11,872
|
|
Commercial property
|
|
1,078
|
|
|
344
|
|
|
1,422
|
|
|
1,157
|
|
|
297
|
|
|
1,454
|
|
Commercial multi-peril
|
|
2,063
|
|
|
1,951
|
|
|
4,014
|
|
|
2,089
|
|
|
1,886
|
|
|
3,975
|
|
Commercial automobile
|
|
2,395
|
|
|
1,648
|
|
|
4,043
|
|
|
2,339
|
|
|
1,661
|
|
|
4,000
|
|
Workers’ compensation
|
|
10,260
|
|
|
9,329
|
|
|
19,589
|
|
|
10,299
|
|
|
9,216
|
|
|
19,515
|
|
Fidelity and surety
|
|
244
|
|
|
313
|
|
|
557
|
|
|
280
|
|
|
288
|
|
|
568
|
|
Personal automobile
|
|
2,002
|
|
|
1,355
|
|
|
3,357
|
|
|
2,038
|
|
|
1,400
|
|
|
3,438
|
|
Homeowners and personal—other
|
|
889
|
|
|
867
|
|
|
1,756
|
|
|
942
|
|
|
884
|
|
|
1,826
|
|
International and other
|
|
2,643
|
|
|
1,490
|
|
|
4,133
|
|
|
2,574
|
|
|
1,431
|
|
|
4,005
|
|
Property-casualty
|
|
26,368
|
|
|
24,336
|
|
|
50,704
|
|
|
26,498
|
|
|
24,155
|
|
|
50,653
|
|
Accident and health
|
|
14
|
|
|
—
|
|
|
14
|
|
|
15
|
|
|
—
|
|
|
15
|
|
Claims and claim adjustment expense reserves
|
|
$
|
26,382
|
|
|
$
|
24,336
|
|
|
$
|
50,718
|
|
|
$
|
26,513
|
|
|
$
|
24,155
|
|
|
$
|
50,668
|
|
The $50 million increase in gross claims and claim adjustment expense reserves since
December 31, 2018
primarily reflected the impacts of (i) higher volumes of insured exposures and loss cost trends for the current accident year and (ii) catastrophe losses in the first
three
months of
2019
, largely offset by the impacts of (iii) payments related to catastrophe losses incurred in 2018 and (iv) net favorable prior year reserve development.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See note 1 of notes to the unaudited consolidated financial statements contained in this quarterly report and in the Company’s 2018 Annual Report for a discussion of recently issued accounting pronouncements.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
This report contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:
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the Company’s outlook and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, renewal premium changes, underwriting margins and underlying underwriting margins, net and core income, investment income and performance, loss costs, return on equity, core return on equity and expected current returns and combined ratios and underlying combined ratios);
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share repurchase plans;
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future pension plan contributions;
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the sufficiency of the Company’s asbestos and other reserves;
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the impact of emerging claims issues as well as other insurance and non-insurance litigation;
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the cost and availability of reinsurance coverage;
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the impact of investment (including changes in interest rates), economic (including inflation, recent changes in tax law, rapid changes in commodity prices and fluctuations in foreign currency exchange rates) and underwriting market conditions;
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strategic and operational initiatives to improve profitability and competitiveness;
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the Company's competitive advantages;
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the impact of new or potential regulations imposed or to be imposed by the United States or other nations, including tariffs or other barriers to international trade; and
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the impact of legislation enacted or to be enacted by states allowing victims of sexual abuse to file or proceed with claims that otherwise would have been time-barred.
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The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.
Some of the factors that could cause actual results to differ include, but are not limited to, the following:
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catastrophe losses could materially and adversely affect the Company’s results of operations, its financial position and/or liquidity, and could adversely impact the Company’s ratings, the Company’s ability to raise capital and the availability and cost of reinsurance;
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if actual claims exceed the Company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, the Company’s financial results could be materially and adversely affected;
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during or following a period of financial market disruption or an economic downturn, the Company’s business could be materially and adversely affected;
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the Company’s investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses;
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the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
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the intense competition that the Company faces, and the impact of innovation, technological change and changing customer preferences on the insurance industry and the markets in which the Company operates, could harm its ability to maintain or increase its business volumes and its profitability;
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disruptions to the Company’s relationships with its independent agents and brokers or the Company’s inability to manage effectively a changing distribution landscape could adversely affect the Company;
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the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;
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the effects of emerging claim and coverage issues on the Company’s business are uncertain;
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THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS, Continued
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the Company may not be able to collect all amounts due to it from reinsurers, reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all and the Company is exposed to credit risk related to its structured settlements;
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the Company is also exposed to credit risk in certain of its insurance operations and with respect to certain guarantee or indemnification arrangements that it has with third parties;
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within the United States, the Company’s businesses are heavily regulated by the states in which it conducts business, including licensing, market conduct and financial supervision, and changes in regulation may reduce the Company’s profitability and limit its growth;
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a downgrade in the Company’s claims-paying and financial strength ratings could adversely impact the Company’s business volumes, adversely impact the Company’s ability to access the capital markets and increase the Company’s borrowing costs;
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the inability of the Company’s insurance subsidiaries to pay dividends to the Company’s holding company in sufficient amounts would harm the Company’s ability to meet its obligations, pay future shareholder dividends and/or make future share repurchases;
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the Company’s efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may create enhanced risks;
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the Company may be adversely affected if its pricing and capital models provide materially different indications than actual results;
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the Company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology, particularly as its business processes become more digital;
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if the Company experiences difficulties with technology, data and network security (including as a result of cyber attacks), outsourcing relationships or cloud-based technology, the Company’s ability to conduct its business could be negatively impacted;
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the Company is also subject to a number of additional risks associated with its business outside the United States, such as foreign currency exchange fluctuations (including with respect to the valuation of the Company's foreign investments and interests in joint ventures) and restrictive regulations as well as the risks and uncertainties associated with the United Kingdom's withdrawal from the European Union;
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regulatory changes outside of the United States, including in Canada, the United Kingdom, the Republic of Ireland and the European Union, could adversely impact the Company’s results of operations and limit its growth;
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loss of or significant restrictions on the use of particular types of underwriting criteria, such as credit scoring, or other data or methodologies, in the pricing and underwriting of the Company’s products could reduce the Company’s future profitability;
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acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;
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the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;
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the Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;
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intellectual property is important to the Company’s business, and the Company may be unable to protect and enforce its own intellectual property or the Company may be subject to claims for infringing the intellectual property of others;
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changes in federal regulation could impose significant burdens on the Company and otherwise adversely impact the Company’s results;
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changes in U.S. tax laws or in the tax laws of other jurisdictions where the Company operates could adversely impact the Company; and
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the Company’s share repurchase plans depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, changes in levels of written premiums, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.
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The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the captions “Part I—Item 1A—Risk Factors” in the Company’s 2018 Annual Report filed with the SEC and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s 2018 Annual Report as updated by the Company's periodic filings with the SEC.
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
WEBSITE AND SOCIAL MEDIA DISCLOSURE
The Company may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at
http://investor.travelers.com
, its Facebook page at
https://www.facebook.com/travelers
and its Twitter account (@Travelers) at
https://twitter.com/Travelers
. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Notifications” section under the "For Investors" heading at
http://investor.travelers.com
.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the Company’s disclosures about market risk, please see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2018 Annual Report filed with the SEC. There have been no material changes to the Company’s disclosures about market risk in Part II—Item 7A of the Company’s 2018 Annual Report.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of
March 31, 2019
. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of
March 31, 2019
, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
In addition, there was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended
March 31, 2019
that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company regularly seeks to identify, develop and implement improvements to its technology systems and business processes, some of which may affect its internal control over financial reporting. These changes may include such activities as implementing new, more efficient systems, updating existing systems or platforms, automating manual processes or utilizing technology developed by third parties. These systems changes are often phased in over multiple periods in order to limit the implementation risk in any one period, and as each change is implemented the Company monitors its effectiveness as part of its internal control over financial reporting.