Alan D. Schnitzer
Chairman and Chief Executive Officer
“Continuing to deliver
remains our highest priority.”
To Our Shareholders
Travelers is many things to many people. We are a company whose North Star is to deliver industry-leading returns over time for our shareholders. We are a place where people and businesses turn to protect and grow what they have built when times are good and to recover in times of need. And as I say to my 30,000 colleagues, Travelers is us. We are the people who come to work every day to fulfill the Travelers Promise to take care of our customers, our communities and, importantly, each other. We are a deeply committed group of people working together to ensure that we are performing today and transforming for tomorrow.
That is the power of Travelers, and in 2018, Travelers delivered net income of $2.5 billion and return on equity of 11.0%. Our ability to generate that level of profit and profitability in a year with an outsized $1.4 billion of after-tax catastrophe losses speaks to the earnings power of our franchise and the value of our diversified business. We are also pleased that we grew our business by continuing to execute successfully on our strategic initiatives and marketplace strategies, generating record net written premiums of $27.7 billion. Continuing to deliver industry-leading results remains our highest priority.
Our formidable competitive advantages are the foundation of our success. We understand that the capabilities that have fueled our achievements over the past decade will not necessarily be the same as those we will need to continue to lead for the next decade. Accordingly, innovating to ensure that we are well-positioned to continue to meet our goals in a world of unprecedented change is also a key priority. In 2018, we continued to make significant progress on our ambitious innovation agenda.
Below I address our long-term strategy for delivering shareholder value and more about our approach to innovating and making investments for our future. But first, let us start with a review of our 2018 results and the strategic initiatives that contributed to our strong performance.
Despite another year of historically high catastrophe losses, we generated $2.5 billion of net income, or $9.28 per diluted share, an increase of 23% compared to the prior year. Core income1 was $2.4 billion, and core return on equity was 10.7%, a meaningful spread over the 10-year Treasury and our cost of equity. Our earnings and strong balance sheet enabled us to grow adjusted book value per share by 5%, after continuing to make important investments in our business and returning more than $2.1 billion of excess capital to our shareholders through dividends and share repurchases. Strong net cash flow from operations of $4.4 billion also enabled us to add $1.3 billion to our investment portfolio.
When I consider how we executed on the things that are in our control — underwriting, claims handling, expense discipline, marketplace execution — I could not feel better about what we accomplished in 2018. Particularly in light of the severe catastrophe losses, we were pleased with our underwriting profit, as evidenced by our consolidated combined ratio of 96.9%. Our after-tax underlying underwriting gain of $1.5 billion —
the highest in more than a decade — and strong after-tax net investment income of $2.1 billion both made important contributions to the bottom-line result.
We produced a strong underlying underwriting gain thanks to continued underwriting excellence and also by leveraging our ongoing strategic initiatives to create attractive top-line opportunities and improve productivity and efficiency. Our success is evidenced by record net earned premiums, up 5% over the prior year, and a solid underlying combined ratio of 92.5%.
During the year, we improved our expense ratio to 30.1%, a 60-basis-point improvement over the prior year, and down 140 basis points from 2016. This past year’s expense ratio is as good as we have seen in a long time. Achieving further productivity and efficiency gains continues to be a strategic priority for us. Importantly, improved operating leverage will give us the flexibility to invest further in our strategic priorities, let the benefit fall to the bottom line and/or be more competitive on pricing without compromising our return objectives.
Today’s production generates tomorrow’s earned premiums, and we have made strategic investments over a number of years to position Travelers for a strong, profitable top line. These actions and the disciplined execution of our marketplace strategies were again successful in 2018, creating a tailwind for 2019. We retained our best business at historically high levels, addressed profitability where needed through pricing gains and improved terms and conditions, and created opportunities to write new business. As a result, we grew net written premiums by 6% during 2018 to a record $27.7 billion.
1 See “Additional Information” for a discussion and calculation of non-GAAP financial measures.
2 Excludes the impact of catastrophes and prior year reserve development.
Across all our businesses, our strategic focus continues to include creating opportunities to write more business through retaining and growing our relationships with our high-quality in-force accounts and bringing our franchise value to new customers. As we have done successfully over the past few years, we will continue to seek to grow without compromising our return objectives or changing our risk profile, primarily by targeting customers, industries, products and geographies that we know well. In terms of geography, we believe that geopolitical risk and economic instability around the world are underappreciated today, and so we like our North America concentration. That is not to say that we do not continue to recognize value and evaluate opportunities outside of North America, but we have set an even higher bar for them today.
“Our claims handling ability is at the heart of our promise to our customers and proved again last year to be a significant competitive advantage.”
It is worth noting that in each of the last three decades, average annual insured catastrophe losses in the United States have increased compared to the prior decade, and catastrophe losses in 2018 and 2017 were among the highest over the last 10 years. This trend is due in part to demographic changes, such as population growth and urban expansion, as well as other factors, including changing climate conditions.
I am pleased with the speed and thoughtfulness with which we have responded. As we always do, we have incorporated new information, as well as lessons learned, into our underwriting and pricing. As it relates to the California wildfires in particular, we now view events such as those of the last two years as being less remote than we thought previously. As a consequence of that, as well as the longer-term trend in catastrophe losses, for certain perils we have weighted our more recent experience somewhat more heavily than we otherwise would have in modeling catastrophe losses going forward. In addition, to address some ongoing degree of uncertainty surrounding weather volatility, we added a new catastrophe reinsurance treaty to our overall reinsurance program for 2019.
A review of last year’s results would not be complete without acknowledging our catastrophe claim response, which once again was excellent. For starters, our claim professionals bring great expertise and compassion to their work. On top of that, our highly sophisticated claim model enables us to handle virtually 100% of our claims under nearly any foreseeable circumstances without resorting to third-party claim handlers, which produces a better experience for our customers and a more efficient outcome for us. As a result, we were able to resolve approximately 95% of our customers’ claims arising out of the largest catastrophes within 30 days. Our claims handling ability is at the heart of our promise to our customers and proved again last year to be a significant competitive advantage.
Each of our businesses is high-performing and contributed meaningfully to our 2018 performance, and collectively, they provide a valuable diversification benefit.
Business Insurance produced a solid underlying combined ratio of 95.7%. For the segment, net written premiums were up 5% to a record $15.0 billion, and for the second consecutive year, we grew our customer base (excluding the National Programs business, much of which we put into runoff). We did that by achieving historically high retentions while delivering more than 5 points of positive domestic renewal premium change for the year. That is a healthy level of price improvement by historical standards. We also generated more than $2 billion in domestic new business premiums,3 a 4% increase over the prior year. A significant majority of the increase in net written premiums for the segment came from higher levels of retention and pricing gains. That speaks to the quality of the growth.
Positive trends in submissions, quotes and new business in our core Commercial Accounts business reflect success with our strategic initiatives. Substantial workflow improvements accomplished through our four recently launched Business Centers complement our local underwriting expertise by centralizing the underwriting of less complex accounts. As a result, approximately 40% of our renewing accounts in this business are now flowing through these centers, freeing up our local underwriters to spend more time with our agent and broker partners on new opportunities. This and other initiatives contributed to our Commercial Accounts business delivering its highest level of new business in more than a decade.
3 Excludes National Accounts.
Bond & Specialty Insurance had another exceptional year, with a very impressive underlying combined ratio of 79.4%, while all in, the combined ratio was 69.0%. The combination of strong margins and record earned premiums contributed to a record underlying underwriting gain. Continued strong production in both our Management Liability and Surety businesses generated net written premium growth of approximately 7% to $2.5 billion. Both retention and new business in our domestic Management Liability business were at record levels. These results are just the latest example of this segment’s remarkable performance over time.
Personal Insurance results were strong, with an underlying combined ratio of 91.0%. In terms of production, Personal Insurance achieved overall net written premium growth of 7% to a record $10.2 billion in 2018, driven by strong Auto renewal price change, along with domestic policies-in-force growth of 6% in our Agency Homeowners & Other business. Our balanced portfolio of Auto and Homeowners and our ability to provide a whole account solution is an important differentiator. Two years ago, we had a $4 billion book of Agency Automobile business that was experiencing profitability challenges due to industrywide increased bodily injury severity. Today, it is a $5 billion business with a full-year combined ratio that meets our return expectations. Thanks to impressive execution by our team, we achieved the targeted improvement in returns ahead of schedule. This success enables us to renew our focus on profitably growing our Auto book of business going forward. The underlying returns in our Agency Homeowners & Other business remain attractive.
Our high-quality investment portfolio generated net investment income of $2.1 billion after-tax in 2018, $230 million higher than in the prior year. As we have discussed in the past, we strive to be thoughtful underwriters on both sides of our balance sheet, and we have always managed our investment portfolio to support our insurance operations, not the reverse. Our investment strategy of seeking appropriate risk-adjusted returns has resulted in investment income that has been a reliable contributor year in and year out to the high level and low volatility of our industry-leading returns.
Our results in 2018 benefited from tax reform, which substantially closed a loophole that for more than three decades favored foreign insurers to the detriment of domestic insurers. With a level playing field, we can be more competitive relative to foreign insurers.
Of course, our results also reflected a lower corporate tax rate. The incremental earnings enabled us to accelerate some important investments, including in our employees. Among other things, we increased our minimum hourly wage in the United States to $15 an hour. We also recently announced an innovative new benefit for our employees, which takes the tough choice out of paying down student debt or saving for retirement. Starting in 2020, payments by eligible employees toward their student loans will qualify for our 401(k) Plan “matching” program.
Consistent and Successful Long-Term Financial Strategy Delivers Shareholder Value
These strong results demonstrate the continued successful execution of our long-term financial strategy. At Travelers, our simple and unwavering mission for creating shareholder value is to:
• Deliver superior returns on equity by leveraging our competitive advantages;
• Generate earnings and capital substantially in excess of our growth needs; and
• Thoughtfully rightsize capital and grow book value per share over time.
We have been clear for many years that one of our crucial responsibilities is to produce an appropriate return on equity for our shareholders. Our 2018 return on equity of 11.0% and core return on equity of 10.7% meaningfully exceeded the average return on equity for the domestic property and casualty industry, which was approximately 5.2% in 2018, according to estimates from the Insurance Information Institute. As shown in the accompanying chart, our return on equity has significantly outperformed the average return on equity for the industry in each of the past 10 years.
U.S. P&C Insurers4
4 Average GAAP return on equity from Insurance Information Institute for 2009-2018; 2017 and 2018 are estimates.
Importantly, over this 10-year period, our return on equity has also been less volatile than that of others in the property and casualty industry. The level and consistency of our return on equity over time reflect the value of our competitive advantages and demonstrate the discipline with which we run our business.
Our financial success and balance sheet strength have enabled us to grow book value per share at an average annual rate of 7% over the last 10 years, and that is after making important investments in our business and returning more than $34 billion of excess capital to our shareholders through dividends and share repurchases. Over that period, we grew dividends per share at an average annual rate of 10%. Notably, since we began our share repurchase program in 2006, we have returned approximately $43 billion of excess capital to our shareholders through dividends and share repurchases, which is well in excess of the market capitalization of the company at that time. We repurchased those shares at an average price per share of $65.84.
Our capital management strategy has been an important driver of shareholder value creation over time. As we have said many times, our first objective for the capital we generate is to reinvest it in our business — organically and inorganically — to create shareholder value. We will continue to retain capital to support growth in our business and invest capital to further our ambitious innovation agenda and advance other strategic objectives. Today, we are making strategic investments in everything from talent to technology. Having said that, we are disciplined stewards of our shareholders’ capital, and to the extent that we continue to generate capital that we cannot reinvest consistent with our objective of generating industry-leading returns over time, we will manage it the same way we have for more than a decade — by returning it to our shareholders.
Ultimately, the success of our strategy — with all its component parts — drives our superior total returns to shareholders over time. We have a track record of managing the company to create value over the long term, through periods of weather volatility; through anticipated and unanticipated developments impacting loss trends; and through both foreseeable economic cycles and more extreme economic conditions, such as the 2008 financial crisis.
We could not be more confident that executing on our long-term financial strategy, managing Travelers with an “over time” discipline and investing in our competitive advantages is the right approach for building on Travelers’ outstanding record.
S&P 500 Financials
5 Represents the change in stock price plus the cumulative amount of dividends, assuming dividend reinvestment.
For each year on the chart, total return is calculated with January 1, 2008, as the starting point and December 31
of the relevant year as the ending point. Source: Bloomberg and S&P Global Market Intelligence
Investing in Our Future
We are pursuing an ambitious innovation agenda, which is designed to ensure that our competitive advantages remain relevant and differentiating to drive our long-term success. Our perform and transform mindset and our culture of innovation have become important parts of our DNA. We are pursuing innovation in service of our vision to be the undeniable choice for the customer and an indispensable partner to our agents and brokers. In support of that vision, we have established three priorities: extend our advantage in risk expertise; provide great experiences for our customers, agents and brokers; and optimize our productivity and efficiency.
Extend our advantage in risk expertise. Understanding risk, and the products and services our customers need to manage risk, has been foundational to our success for decades. Core to that is our ability to balance the science and art of risk-based decision making based on data and analytics. That skill set requires a combination of deep expertise and a special culture that values collaboration and long-term success. It is an important competitive advantage developed over a long period of time, and one we believe is very difficult to replicate. We continue to extend our advantage by investing in areas like predictive modeling, advanced analytics, robotic process automation, machine learning, artificial intelligence and new products.
As an example, I never tire of showcasing the incredible work our Claim organization has done to develop and advance our Early Severity Predictor® program, which uses data and analytics to predict which injured workers are most at risk for chronic pain and, therefore, opioid addiction. This program continues to produce amazing results for our customers and their employees, and for us. Most importantly, it saves lives and families. Since the program’s inception in 2015, we have applied the model to nearly 50,000 injured workers. We estimate that this has resulted in loss cost savings of more than $150 million due to a substantial reduction in surgeries performed and opioids prescribed, and a more rapid return-to-work by impacted employees. Today, we apply this model to 100% of the workers compensation lost time claims that we receive.
At the other end of the spectrum in terms of claim complexity is the TravComp® digital capability for injured workers. We completed the countrywide rollout of this program in 2018. This is more than just a new app; it is a mobile-enabled resource we put in the hands of injured workers, supported by a completely redesigned internal workflow at Travelers. As compared to the Early Severity Predictor, which identifies cases that have a higher propensity for severity and require greater intervention to manage claim costs, the analytics behind the TravComp digital tool identify those injured workers who are at low risk for severity and who can benefit from a streamlined digital model. It provides a better experience for the injured workers, a better outcome for our customers and a more efficient result for Travelers.
Both the Early Severity Predictor and the TravComp digital capability will produce even better results with time.
Innovation + Technology
We are pursuing innovation in service of our vision to be the undeniable choice for the customer and an indispensable partner to our agents and brokers. Through new initiatives and relationships, we are advancing our ambitious innovation agenda.
Travelers teamed up with Amazon to offer smart home kits and valuable insurance and risk management information through the insurance industry’s first digital storefront on Amazon. Eligible customers receive a free Echo Dot and discounts on homeowner policies with smart home kit purchases. Consumers interested in a home insurance quote are directed from the storefront to the Travelers website or an independent insurance agent. Travelers also introduced Alexa skills that give consumers access to home safety and maintenance tips and help customers answer billing and payment questions. It is early days, but we anticipate that, over time, these types of initiatives to meet customers where they are will lead to new business opportunities while also improving loss costs and providing us with valuable insights.
As the Internet of Things space rapidly advances, we are deploying multiple “test and learn” proofs of concept to determine whether certain smart devices can predict, prevent and/or mitigate injuries and property losses, such as from water leaks, fire damage and theft. Through a collaboration with Gilbane Building Company and Triax Technologies, Travelers is exploring how connected devices can address construction-related injuries and property losses. Gilbane is a global leader in construction and facilities-related services and has been a customer of ours for more than 100 years. Triax is a leader in wearable construction technology. Together, we will explore how data collected from Triax devices can help keep workers safe, and projects on track.
Outside the United States, Travelers made a majority investment in startup Zensurance. This Toronto-based digital insurance provider uses advanced data and analytics to identify the most common risks that small businesses face and designs insurance packages best suited for their respective industries. Zensurance is a natural fit with our Simply Business team, further adding to our digital capabilities and medium-term strategic positioning to serve small businesses.
Travelers’ strategic investment in Kittyhawk last year supports the growth and effectiveness of our drone program. We were one of the first insurers to integrate drone operations into claim inspections, and today, we have more than 650 claim professionals who are FAA-certified drone pilots. Together, they completed more than 20,000 flights in 2018. Drones make the claim process more efficient and keep our employees safe — a better outcome for our customers and for us.
Travelers is now Lyft’s provider of auto insurance claim service in the United States. Lyft is available to approximately 95% of the U.S. population and has provided more than 1 billion rides. To support them, we have established a dedicated Travelers claim team, with eight countrywide hub locations, to deliver high-quality, customized claim services.
Travelers is collaborating with Cedars-Sinai, Samsung Electronics America, Bayer and appliedVR to explore the effectiveness of using state-of-the-art virtual reality technology to manage pain associated with orthopedic injuries.
Lexus recently selected Travelers as its auto insurance provider for an innovative leasing option. The new Lexus Complete Lease — a two-year, 20,000-mile lease program — conveniently bundles the cost of a vehicle, auto insurance, connected services and maintenance into a single monthly payment. Our policy includes auto liability and physical damage coverage, ensuring peace of mind and protection for Lexus Complete Lease guests.
Creating the Industry’s First Digital Storefront on Amazon
Using Wearable Devices to Mitigate Construction Risk
Tailoring Insurance Solutions for Small Businesses in Canada
Handling Claims More Efficiently and Reducing the
Time From Claim to Claim Payment
Managing U.S. Claims for Lyft
Using Virtual Reality to Manage Pain
Meeting Customers Where They Are
Our long-term success — our ability to create value for our shareholders over time — depends not only on our financial strategy and competitive advantages but also on keeping our promise to be there for our customers, communities and employees. For this reason, sustainability is embedded in the way in which we conduct our business.
We have identified 15 sustainability-related topics as most relevant to our business and our stakeholders: Capital and Risk Management; Climate Strategy; Community; Customer Experience; Data Privacy & Cybersecurity; Disaster Preparedness & Response; Diversity & Inclusion; Eco-Efficient Operations; Ethics & Values; Governance; Human Capital Management; Innovation; Investment Management; Public Policy; and Safety & Health.
On these pages, we provide just a few examples of our initiatives in the areas of Diversity & Inclusion and Community.
Diversity and Inclusion as a Business Imperative
Diverse experiences and viewpoints yield greater insights and better outcomes, raising the bar on individual and team performance, sparking further innovation and sharpening our customer focus. For us, diversity and inclusion is a business imperative.
At Travelers, what underlies all our competitive advantages is our greatest asset — our people. We benefit from the expertise of our long-tenured employees and from the fresh perspectives of our new colleagues. We aim to attract, retain and promote the very best talent from the broadest possible pool of talent.
Our Diversity Networks — voluntary groups of employees dedicated to fostering a diverse and inclusive work environment — boast more than 11,000 members and have become a key part of our overall diversity and inclusion strategy. Several Diversity Network leaders are featured in our new diversity and inclusion advertisements.
Travelers developed the Small Business Risk Education program in 2012 to provide entrepreneurs with a broad understanding of risk management to help them sustain and grow their businesses. Since we launched the program, nearly 2,000 representatives of women-, minority- and veteran-owned small businesses have learned about topics like business continuity and cybersecurity, as well as other emerging business issues.
By doing business with diverse suppliers, Travelers promotes the development of these enterprises, supports the growth of the communities in which we do business and aligns contractor diversity to our workforce and customer base. Annually, Travelers spends more than $100 million with Tier 1 and Tier 2 diverse suppliers.
Travelers has been recognized for our commitment to diversity and inclusion. For example: Forbes named us to its 2019 list of America’s Best Employers for Diversity; we have been on VIQTORY’s Military Friendly® Employer list for more than a decade; we are among the Best Places to Work for LGBTQ Equality by the Human Rights Campaign Foundation; we are also a Best Place to Work for Disability Inclusion by Disability:IN and the American Association of People with Disabilities; and Travelers in the United Kingdom has become the only insurance company to achieve the Clear Assured bronze standard from The Clear Company for inclusive best practices.
Travelers launched a new initiative to lead the industry in advocating for women in insurance. We call it SHE TravelsSM to highlight our support of the positive momentum of women in our industry. The program seeks to raise awareness of insurance as a fantastic career opportunity for women, promote professional development for women in the industry and facilitate effective networking and mentoring. Since launching the initiative last fall, we have held a series of networking and mentoring events with more than 1,500 participants across the United States.
Our Talent Advantage
Advocating for Women in Insurance
Building a Stronger Tomorrow in Our Communities
At Travelers, we know that we can only have a thriving, sustainable business if the communities in which we live and work are thriving too. That means they need to be full of educational and economic opportunities, safe, empowered and resilient. That’s why our connection to the community is such a big part of who we are.
Since we became title sponsor in 2007, the Travelers Championship has generated more than $16 million for more than 700 local charities. The tournament also has an estimated annual economic impact of nearly $70 million on the state of Connecticut.
2018 Travelers Championship winner Bubba Watson donates $200,000 to The Hole in the Wall Gang Camp.
Following the devastation from the 2017 hurricanes in Puerto Rico, Travelers partnered with All Hands and Hearts, a nonprofit that deploys volunteers for disaster response, to restore a baseball field and playscape in Yabucoa, giving hundreds of children a place to play.
Improving Academic and Career Success
Fostering Thriving and Resilient Communities
The Travelers Championship
Promoting Safety in Our Communities
Volunteers for Hurricane Relief
* * *
It is an honor to lead this great company. I am enormously grateful for the trust of the customers we are privileged to serve and for the confidence of our shareholders. I am also enormously grateful to everyone who worked tirelessly to deliver this past year’s strong results. Travelers’ success is only possible thanks to the drive and commitment of our 30,000 employees, the insight and partnership of our agents and brokers, and the leadership and counsel of our Board of Directors.
Alan D. Schnitzer
Chairman and Chief Executive Officer
Creating Sustained Value at Travelers
To Our Shareholders
– 2018 Results
– Long-Term Financial Strategy
– Investing in Our Future
– Sustaining Shareholder Value
– Innovation + Technology
– Creating Sustained Value
Board of Directors
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