In 2016, we continued our long track record of delivering industry-leading returns to our shareholders with another year of strong financial results. Our operating return on equity was 13.3%,* consistent with the average annual operating return on equity we have achieved over the last 10 years, despite the historically low interest rate environment. These returns, which represent a meaningful spread over both the 10-year Treasury and our cost of equity, are no accident. We underwrite both sides of our balance sheet deliberately and with a risk-adjusted return in mind.
Our solid underwriting and investment results in 2016 demonstrate the continued successful execution of our long-term financial strategy. Travelers’ simple and unwavering mission for creating shareholder value is to:
We defined “superior returns” many years ago as a mid-teens operating return on equity over time. We emphasize that the objective is measured over time because we recognize that weather, reserve development and interest rates, among other factors, impact our results from year to year, and that there are years — or longer periods — and environments in which a mid-teens return is not attainable and other years in which we expect we will achieve or exceed a mid-teens return. As we’ve said before, our ability to achieve a mid-teens return over time going forward will depend on interest rates returning to more normal levels by historical standards.
Our clarity of mission, and the single-mindedness with which we pursue it, has produced another year of strong financial results, capping off a decade of industry-leading returns on equity. Over the last ten years, we also grew dividends per share at an average annual rate of 10% and increased our book value per share by 125% after returning nearly $37 billion of excess capital to our shareholders. Finally, over the same period, we delivered a total return to shareholders of 193%.
In this letter last year, I observed that after a decade of industry-leading success, we were positioned to carry forward that success and to innovate and lead. With that in mind, let’s take a look at the financial results we achieved in 2016.
1 Average GAAP return on equity from Insurance Information Institute for 2007-2016; 2016 is an estimate.
* See “Additional information” for a discussion and calculation of return on equity and operating return on equity.
In 2016, we posted strong net income of $3.014 billion and net income per diluted share of $10.28. We delivered excellent underwriting results across our business segments, with a consolidated combined ratio of 92.0%, demonstrating the value of our competitive advantage in underwriting excellence and the impact of industry-leading data and analytics, which are decades in the making and are continually improving. We also generated record net written premiums of $24.958 billion in 2016, up 3.5% year-over-year.
Each of our business segments contributed to the growth we achieved and more broadly to our solid 2016 performance.
Business and International Insurance posted strong full-year financial and production results and continued to generate excellent returns, achieving a combined ratio of 94.3% for the year. The segment’s results also benefited from our very successful settlement of a reinsurance dispute, which contributed a $126 million pre-tax gain ($82 million after-tax). Our ability to manage complex litigation on behalf of our insureds and our shareholders is an important strategic capability.
In domestic Business Insurance, given the successful execution of our strategy going back to 2010 to improve underwriting profitability, our strategy during 2016 was to continue to focus on retaining our more profitable business and successfully achieving rate gains where needed, while actively seeking attractive new business opportunities. I couldn’t be more pleased with our execution. Retention was at a historically high level, and we achieved positive rate change. We were also able to generate significant new business premiums. Production results were also strong in our International business, including as a result of our new global construction and renewable energy businesses at Lloyd’s.
In Bond & Specialty Insurance, the underlying combined ratio of 79.7% was an all-time best, marking another year of exceptional results. We achieved these results through disciplined underwriting, aggressive management of risk and limits, and strong account and agency relationships, along with superior analytics and claims management. The Management Liability portfolio produced record retention levels and higher levels of new business as compared to 2015. Among other highlights, our successful Private/Non-Profit business and our relatively new cyber product have seen attractive levels of growth, demonstrating our ability to both manage an established business and develop innovative products. Our cyber rollout has benefited from the work of the Travelers Institute®, our public policy think tank, which has held more than 20 Cyber: Prepare, Prevent, Mitigate, RestoreSM symposia across the country in conjunction with Federal Reserve regional banks and the U.S. Department of Homeland Security. In our Surety business, we continued to produce an industry-leading combined ratio and generated modest growth in net written premiums. The financial performance of our Management Liability and Surety businesses, both highly credit sensitive, has been remarkable, including through very challenging economic environments.
In Personal Insurance, the segment generated a strong combined ratio of 95.1%, while both Homeowners and Auto delivered accelerating growth in policies in force and net written premiums throughout the year.
In Personal Auto, profitability was affected by an increase in bodily injury losses, which we believe is principally environmental as opposed to specific to us or our Quantum Auto 2.0® product. Loss trends change in our business, and when that happens, our goal is to leverage our data and analytics to react as quickly as possible. In this regard, I note that our revised loss estimates related to recent quarters, not recent years. In response, we are taking the appropriate actions to improve our Personal Auto profitability. As we improve performance relative to our target returns, to the extent we are successful in retaining the high volume of new business that we added during the year, it will contribute to future profitability.
Our agency Homeowners business once again produced superior financial results, with an outstanding 2016 combined ratio of 83.9%. Homeowners net written premiums in 2016 grew for the first time since 2011, benefiting meaningfully from the growth in Auto.
Going forward, our leading position in Personal Insurance in the agency channel, along with our ability to offer a whole-account solution — both auto and home — gives us an important competitive advantage. About half of our personal lines premium comes from accounts for which we write both the auto and home products. Our retention is higher on those accounts, contributing to higher lifetime account value. Also, the attractive returns we achieve on the homeowners business allow us to write the auto product at a somewhat higher combined ratio and still achieve our target returns for the segment. We believe that, over time, our ability to offer both the auto and home products will become increasingly important as technology evolves and the driving experience becomes increasingly autonomous. As that happens, we believe that for the industry, the homeowners product will come to represent a larger part of the personal insurance transaction.
As in prior years, our 2016 results benefited from reliable net investment income of $2.302 billion pre-tax ($1.846 billion after-tax). We continue to experience declines in fixed income returns in line with our expectations due to reinvestment rates that remain at historically low levels. In our alternative investment portfolio, our hedge fund and private equity fund investments produced slightly higher returns in 2016 as compared to 2015, largely due to a rise in oil and gas prices and an increase in M&A activity. We emphasize risk-adjusted returns and credit quality, rather than reaching for returns that are not consistent with the underlying risk.
|EARNED PREMIUMS||$ 24,534||$ 23,874||$ 23,713||$ 22,637||$ 22,357|
|TOTAL REVENUES||$ 27,625||$ 26,815||$ 27,174||$ 26,206||$ 25,756|
|OPERATING INCOME||$ 2,967||$ 3,437||$ 3,641||$ 3,567||$ 2,441|
|NET INCOME||$ 3,014||$ 3,439||$ 3,692||$ 3,673||$ 2,473|
|NET INCOME PER DILUTED SHARE||$ 10.28||$ 10.88||$ 10.70||$ 9.74||$ 6.30|
|TOTAL INVESTMENTS||$ 70,488||$ 70,470||$ 73,261||$ 73,160||$ 73,838|
|TOTAL ASSETS||$ 100,245||$ 100,184||$ 103,078||$ 103,812||$ 104,938|
|SHAREHOLDERS’ EQUITY||$ 23,221||$ 23,598||$ 24,836||$ 24,796||$ 25,405|
|RETURN ON EQUITY||12.5%||14.2%||14.6%||14.6%||9.8%|
|OPERATING RETURN ON EQUITY||13.3%||15.2%||15.5%||15.5%||11.0%|
|BOOK VALUE PER SHARE||$ 83.05||$ 79.75||$ 77.08||$ 70.15||$ 67.31|
|DIVIDENDS PER SHARE||$ 2.62||$ 2.38||$ 2.15||$ 1.96||$ 1.79|
The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property and casualty insurance for auto, home and business. The company’s diverse business lines offer its customers a wide range of coverage sold primarily through independent agents and brokers. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and operations in the United States and selected international markets.
Going into 2017, we are especially mindful of the shifting political and economic landscape. While no one can be certain how actual events will unfold, we are confident that we are well positioned to continue to succeed and deliver industry-leading returns in this changing environment.
The new administration is on the record as advocating for growth-oriented policies, including greater infrastructure spending, tax reform and a more business-friendly regulatory environment. Given the businesses we are in, the products we sell and our geographic footprint, we believe we are in a strong position to benefit from the additional insured exposures that would result from economic growth. Just as two examples, a growing economy would result in increased demand for both the workers compensation and surety products, two lines in which we have a leading position in the United States. In addition, after nearly a decade of historically low interest rates, a rise in interest rates as a result of increased economic activity would benefit our predominantly fixed income investment portfolio.
As I mentioned in last year’s letter, one of the areas in which we have been and will continue to be vocal is regarding threats to the competitiveness of our domestic insurance industry. Specifically, we continue to see the U.S. corporate tax rate — the highest of any industrialized nation — as encouraging insurers to shift capital offshore, ultimately harming the U.S. economy. As a primarily domestic U.S. insurer, we believe strongly that the guiding principle for any tax reform should be leveling the playing field for U.S. companies. We believe that a level playing field will be good for the economy and will create jobs.
Since the 2016 election, I have been asked a number of times about the impact of potentially lower tax rates and higher net investment income on the insurance marketplace. The question is often framed this way: “Will insurers ‘give back’ the benefits in the form of lower pricing?” At least as it relates to Travelers, the question incorrectly assumes that we price with a volume objective. We don’t. We price based on a return objective, and we establish our return thresholds relative to our cost of capital. I would observe that one impact of a lower tax rate is that our after-tax cost of debt, and therefore our cost of capital, will increase. Also, if an increase in economic activity leads to an increase in the risk-free rate, our cost of equity, and again our cost of capital, will increase. The increase in the cost of capital will need to be met by an increased return. The extent to which pricing will need to adjust — up or down — to produce that return will depend on the extent to which we achieve that increased return through higher profits as a result of a lower tax rate and/or higher net investment income. Of course, the competitive marketplace will also impact pricing.
Our strong performance over time has positioned us well for continued success. Our goal is to leverage this success to capture the opportunities that changes in our industry and in the wider world inevitably will present; for example, as a result of advancing technologies, shifting demographics and changes in the landscape of distribution.
We’re not only committed to delivering industry-leading results today, we’re committed to sustaining our ability to do so for the next decade. We’re making smart investments in areas such as talent, data and analytics, products and technology. We’re leveraging new technology and redesigning the way we develop, manufacture and sell our products and services to improve our productivity and efficiency. And we’re anticipating how tomorrow’s customers and our agent and broker partners will access and interact with our products and services. We seek to be an undeniable choice for our customers and an indispensable partner for our agents and brokers.
I’ve said many times that we view our ability to execute strategic transactions as a core competency and that the test for any potential transaction is that it contribute to our mission by improving our long-term return profile, reducing the volatility of our results and/or creating shareholder value through some other important strategic benefit. We recently announced that we agreed to acquire Simply Business, a transaction that passes this test.
Simply Business, a leading provider of small business insurance policies in the United Kingdom, is a profitable and growing technology company with impressive strategic capabilities, leading digital commerce talent and proven small business insurance expertise. Simply Business offers products online on behalf of a broad panel of carriers. Operating since 2005, it has more than 425,000 microbusiness customers, covering more than 1,000 classes of business. Through its managing general agency, Simply Business participates as a panel member and underwrites a meaningful amount of the total premium it places through its platform each year. This demonstrates the value of its product and underwriting capabilities, as well as its customer analytics. Over time, we expect that Simply Business will provide us with efficient access to serve the substantial microbusiness market in the United States and potentially other geographies.
More broadly, with technology and innovation driving customer preferences and expectations, advancing our digital agenda to best serve our customers and the marketplace is a key strategic priority. What really excites us is that Simply Business will help us accelerate that agenda. Also, as an important part of that agenda, we look forward to working with our agent and broker partners as we seek to deploy Simply Business’ capabilities to make the small commercial insurance transaction easier, faster and more efficient.
The Simply Business transaction also illustrates an important aspect of our international franchise. While our primarily U.S. footprint is very attractive given the prospects for the U.S. economy, particularly relative to the economic instability and geopolitical risk in so many regions around the world, having operations outside the country provides us with strategic value. It provides us with a platform from which we can identify new business opportunities, recruit world-class talent and acquire or develop strategic capabilities. Our proposed acquisition of Simply Business is a perfect example of all three.
Building for the future also requires that we maintain our talent advantage, and in that regard, diversity and inclusion is a business imperative. Our efforts are aimed at attracting and retaining the best talent from the broadest possible pool of talent. 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. We’re proud that in 2016, we were named as one of DiversityInc’s 25 Noteworthy Companies, a Best Place to Work for LGBT Equality by the Human Rights Campaign Foundation, a Top 100 Military Friendly® Employer by Victory Media, publisher of G.I. Jobs®, and to the Best for Vets list by Military Times. Today’s diverse and inclusive workforce will be an important factor in tomorrow’s success.
In addition to focusing on the sustainability and profitability of our business, we’re also focused more broadly on the sustainability and prosperity of the communities we call home. Through corporate funding and the Travelers Foundation, we support academic and career success, develop thriving neighborhoods and enhance lives through arts and culture. Travelers has contributed more than $200 million to these causes over the last decade.
I’m proud that our company and our employees are giving at greater rates than ever before. Last year’s employee giving campaign generated more than $5 million for important causes. On top of that, Travelers’ employees logged nearly 118,000 volunteer hours last year, up 30% from the previous year and 63% from two years ago. More important than the time spent volunteering, of course, is the impact of those efforts. As just one example of that, Travelers employees participated in the building of 55 Habitat for Humanity homes during 2016.
We are particularly excited about one of our new initiatives: building community-designed playgrounds with KaBOOM!, a nonprofit that brings neighbors together to build beautiful, environmentally friendly playgrounds in underserved communities. During 2017, we will sponsor the construction of six playgrounds across the United States. Each playground will be built with the help of 125 Travelers employees and agents alongside 75 community members. We’re passionate about this initiative because we believe that investing in children is important and that play matters. It allows children to create, explore, solve and imagine, promoting brain development, creative thinking and problem solving. Unfortunately, too many kids don’t have the benefit of safe, open spaces.
Our employees’ spirit of giving is just one example of what makes our workforce extraordinary. No other company can match our culture of heart and passion. We owe the strength of our position to the collective efforts of more than 30,000 people who execute in the marketplace every day.
I’m grateful to every person who helped us deliver this past year’s results: each of our employees, our agent and broker partners, the customers we are privileged to serve and our Board of Directors, who have provided essential guidance and counsel.
This is our team: talented, dedicated and motivated. Unburdened by distraction, we will continue to invest in our competitive strengths, press the formidable advantages that we have and develop new areas of distinction in pursuit of a new era of success.