“In a year of unprecedented weather, and in a period impacted by historically low interest rates and pricing below loss cost inflation, Travelers delivered more than $2 billion in profit and a 9% core return on equity.”
In a year of unprecedented weather, and in a period impacted by historically low interest rates and pricing below loss cost inflation, Travelers delivered more than $2 billion in profit and a 9% core return on equity11See “Additional Information” for a discussion and calculation of core return on equity.. These results are a testament to the earnings power of our franchise, built on our rock-solid foundation of underwriting, claims handling and investment expertise.
Our success in 2017 was enabled by our formidable competitive advantages and the investments we have made in them over many years. That is a good reminder that the investments we are making today will ensure that our competitive advantages remain relevant and differentiating tomorrow.
And as much as we are focused on tomorrow, we understand that if we do not continue to perform in the present, we will never have the opportunity to transform for the future. That is why my call to action to our 30,000 employees has been: perform and transform. In this letter, I will share with you how we are thinking about both of these imperatives.
But first, a review of last year’s results.
In a year of challenging circumstances, we generated core income of $2.04 billion, or $7.28 per diluted share, and core return on equity of 9.0% — a meaningful spread over the 10-year Treasury and above our cost of equity. We also grew book value per share by 5%, after returning nearly $2.25 billion of excess capital to our shareholders and making strategic investments in our business.
Particularly in light of a severe catastrophe season, we were pleased with our underwriting profit as evidenced by our consolidated combined ratio of 97.9%. We have deep underwriting talent, and we have been methodical in incorporating lessons learned over the years from events like Hurricane Katrina and Super Storm Sandy into our catastrophe underwriting. Those lessons are reflected in our:
Our catastrophe underwriting results also reflect years of strategic investments in our unique claims handling model, as well as the dedication and compassion of our claim professionals. Hurricane Irma, the most intense hurricane to make landfall on the continental United States in more than a decade, came immediately on the heels of Hurricane Harvey, one of the most destructive flood events in U.S. history. Without breaking stride, we handled tens of thousands of claims. State-of-the-art logistics capabilities and a highly sophisticated cross-training strategy positioned us to handle virtually 100% of our customers’ claims from these storms with our own claim professionals. As a result, we responded quickly to our customers’ needs, closing more than 90% of our property claims following Hurricanes Harvey and Irma within 30 days of the events. Our claims handling capability is a competitive advantage that results in a better outcome for our customers and a more efficient outcome for us.
We also delivered an underlying combined ratio of 92.6% with excellent underlying underwriting results in each of our business segments. Our commercial businesses once again performed well, with strong underlying combined ratios of 94.9% in Business Insurance and 83.2% in Bond & Specialty Insurance. In Personal Insurance, we achieved an underlying combined ratio of 91.5%, notwithstanding the impact of profitability challenges in our Auto business arising from the increase in bodily injury losses we identified at the end of 2016.
“We responded quickly to our customers’ needs, closing more than 90% of our property claims following Hurricanes Harvey and Irma within 30 days of the events.”
Importantly, our profitability also benefited from an 80 basis point improvement year-over-year in our expense ratio, as we grew the top line, made important investments in ongoing and new strategic initiatives, and delivered on our objective of improving productivity and efficiency through technology and workflow.
The execution of our marketplace strategies was also excellent in 2017. We generated record net written premiums of $26.2 billion, up 5% from 2016, with each of our business segments contributing to the growth.
In Business Insurance, net written premiums were up 3% over the prior year. Domestic renewal premium change22Excludes National Accounts. increased throughout 2017, reaching 4% in the fourth quarter, its highest level in three years. We achieved this price improvement while maintaining retention at a historically high level and adding almost $2 billion of new business. Our production results benefited from the technology, tools and process initiatives that we have been rolling out for several years, as we discussed at our Investor Day last fall. Our results also demonstrate that franchise value matters to our customers and distribution partners.
Our marketplace execution in Bond & Specialty Insurance was similarly successful. We grew net written premiums by 4%, driven by growth in both our domestic Surety and Management Liability businesses. In our domestic Management Liability business, we improved renewal premium change by more than 3%, while maintaining retention at a historic high throughout the year and growing new business.
In Personal Insurance, net written premiums were up 9%. We achieved our dual objectives of continued growth in our industry-leading Homeowners business, where policies in force were up more than 5%, and improved pricing and profitability in our Auto business. We are also pleased to have introduced our newest Homeowners product, Quantum Home 2.0SM.
During 2017, we realigned our international businesses so that instead of managing them on a geographic basis, we manage them as part of the three segments through which we currently report our results. By removing geographic barriers, we can better leverage our considerable U.S. domestic capabilities and expertise; more effectively seek opportunities for growth; improve our ability to attract world-class talent in each of our geographies; and acquire, develop and test important new capabilities.
As for our investment results, our high-quality investment portfolio generated net investment income of $2.4 billion pre-tax ($1.9 billion after-tax) in 2017. We are disciplined underwriters on both sides of our balance sheet, and we manage our investment portfolio to support our insurance operations — not the other way around. Our asset allocation and commitment to achieving appropriate risk-adjusted returns have served us remarkably well over many years. This strategy has resulted in net 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.
At Travelers, our simple and unwavering mission for creating shareholder value is to:
Our 2017 return on equity of 8.7% and core return on equity of 9.0% stand in stark contrast to the average return on equity for the domestic property and casualty industry, which was approximately 3.6% in 2017 according to estimates from the Insurance Information Institute. As shown in the accompanying chart, our return on equity has meaningfully outperformed the average return on equity for the industry in each of the past 10 years.
Importantly, over this 10-year time 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 dividends per share at an average annual rate of 10% and increase our book value per share by 107%, in each case over the last 10 years — and that is on top of returning more than $40 billion of excess capital to our shareholders since we began our share repurchase program in 2006.
Our stock also continued to perform well in 2017, with a total return to shareholders, including share appreciation and dividends, of approximately 13%. Over the past decade, our total return to shareholders of over 220% outperformed the Dow 30, the S&P 500 and the S&P Financials.
Our long-term financial strategy has been successful and will continue to serve as the road map for our perform imperative and the measure of our financial success. Looking ahead, I would like to share a few thoughts on three topics related to our performance that I am asked about frequently: our marketplace strategy, our capital management strategy and our acquisition strategy.
Our marketplace strategy is straightforward: we seek to retain our best business, improve the profitability of the business that is not meeting our return objectives and create opportunities to write attractive new business. This strategy will result in different priorities from time to time depending on marketplace dynamics. Since late 2016, for example, a principal objective of our domestic Business Insurance business has been to seek pricing gains to improve the outlook for profitability. The success we have achieved in meeting this objective has been due in large part to our franchise value. Put simply, we have the products, services and capabilities that our customers want to buy and that our agent and broker partners want to sell. Importantly, we have also developed superior data and analytic capabilities over decades that put essential information at the fingertips of our frontline underwriters and product managers, allowing them to make disciplined, return-oriented underwriting decisions consistent with our marketplace strategy. We have a culture of balancing the science and art of risk-based decision making based on data and analytics; it is a competitive advantage and one we believe is very hard to replicate.
“We have the products, services and capabilities that our customers want to buy and that our agent and broker partners want to sell.”
In the second half of 2017, we achieved accelerating pricing gains. Severe hurricanes and wildfires were no doubt one factor influencing the pricing environment. Big events impact pricing when a material amount of industry surplus is eroded and/or when the events change the market’s view of risk. It is not hard to make the case that in 2017 we experienced both.
However, a second — and I believe more significant — factor impacting the pricing environment is that industry returns have been declining generally for a number of years due to historically low interest rates and loss cost inflation outpacing pricing gains.
The pricing gains we achieved in 2017 were a good start. Also, U.S. corporate tax reform, rising reinvestment rates for our fixed income portfolio and the prospect of higher levels of economic growth are winds at our back in terms of profitability.
However, our work to improve the outlook for returns is not complete. We price our products with a return objective in mind. The price increases we have achieved, a lower U.S. corporate tax rate and higher levels of net investment income are just three factors impacting our marketplace strategy. Others include the adequacy of expiring prices, loss cost inflation, expenses, capital requirements, the impact of claims initiatives and our cost of capital.
For Travelers, tax reform and higher levels of net investment income will help shrink, but not completely close, the gap between where our returns are trending and where we would like them to be trending. Accordingly, we will continue to seek to improve the outlook for returns. We will do so in close coordination with our agent and broker partners by selectively and thoughtfully seeking price increases. We believe our customers are best served by a predictable and stable market, and, as a consequence, we favor gradual and manageable price increases to avoid disruption. As always, we will also actively continue to manage all of the other levers of profitability available to us.
I would also like to comment on how corporate tax reform will impact our capital management and acquisition strategies.
We are not changing our capital management strategy. Our first objective for the capital we generate is to reinvest it in our business to create shareholder value. We will continue to retain capital to support growth that meets our disciplined standards. We also have an ambitious innovation agenda. We are making strategic investments in everything from talent to technology, and with the benefit of tax reform, we are accelerating some of these investments. Beyond that, to the extent we continue to generate excess capital, we will manage it the same way we have for more than a decade — we will return it to shareholders through dividends and share repurchases. In other words, as a result of tax reform, we expect to have higher earnings and therefore more capital to evaluate through that framework, but the framework will not change.
With regard to acquisitions, tax reform has leveled the playing field, making us a more competitive buyer relative to non-U.S. companies that previously had the benefit of significant structural tax advantages. Having said that, our lens for assessing transactions and our propensity to do them remain the same. We will continue to look for opportunities that improve our long-term return profile, lower our volatility or create shareholder value by providing us with other important strategic benefits.
Our competitive advantages set us apart; they are foundational to the success of our long-term financial strategy. Nonetheless, we understand clearly that the world is changing, and changing quickly.
Broadly speaking, we see four significant forces of change impacting our industry:
We are focused intently on these forces of change. While our long-term financial strategy is not changing, the competitive advantages that have fueled our success over the last decade will not necessarily be the same as those we will need to continue to lead for the next decade. That is the focus of our innovation agenda: making sure that our competitive advantages are as relevant and differentiating tomorrow as they are today. That is what transformation means for Travelers.
Ultimately, the vision for our innovation agenda is to be the undeniable choice for the customer and an indispensable partner for our agents and brokers. To that end, we have three key organizational priorities:
A key theme running through our investments is that they are designed in large part to enable us to optimize the top line at attractive returns. Importantly, these are not just ideas in the form of blueprints sitting on a drawing board. We have been investing in these priorities for several years, while delivering industry-leading returns and an improving expense ratio. During 2017, we began to see benefits from these investments in the form of a higher top line as well as general and administrative expenses that have been about flat for the past few years.
“The vision for our innovation agenda is to be the undeniable choice for the customer and an indispensable partner for our agents and brokers.”
We are undertaking this work from a position of strength. We have the resources and expertise to be successful, and we benefit from a lack of distraction. Moreover, our business is complex, and the value of deep domain expertise in understanding risk and the products and services our customers need to manage that risk cannot be underestimated as the starting point for innovation. We believe the winners in our industry will be those who can innovate successfully on top of a foundation of excellence.
Since I began communicating our perform and transform imperative, our employees — our greatest asset — have become its biggest champions. I am inspired by their dedication, the wisdom of their experience and their innovative spirit and ideas.
We recognize that to deliver on our promise to customers and produce industry-leading returns over time, we need to maintain our talent advantage. We do so with competitive compensation programs that are designed to attract, motivate and retain the best people; development programs that foster personal and professional growth; and a focus on diversity and inclusion as a business imperative.
We do not just cover our communities with our insurance policies, we cover them with our commitment to their success. Our corporate and employee giving are key elements in the sustainability of our success. We are supporting the places where we live and work, and we do so in part because they do so much to support us. We also see our work in our communities as an expression of our values. It motivates and energizes our 30,000 employees.
In 2017, Travelers and the Travelers Foundation provided more than $22 million of support to worthy causes, bringing our corporate giving over the last 10 years to more than $200 million. On top of that, our employees logged over 143,000 volunteer hours during the year — the most ever — and our employee giving campaign generated $5.4 million for local communities.
While Travelers employees volunteer for, and give to, hundreds of different organizations that are meaningful to them, our corporate philanthropy is focused on three main objectives: academic and career success; thriving neighborhoods; and culturally enriched communities. We profile some of these initiatives on the opposite page.
All of these efforts support our belief that we cannot have a strong business if our communities are not strong and the people who call those communities home do not have economic opportunity and pathways to success.
At the end of a year, it is tempting to tally everything up — every policy written, every risk assessed, every claim closed — in terms of dollars and cents earned. While that is important, it misses an essential point about our business and our company.
I have said many times that our expertise in risk enables us to deliver the dollars and cents. That is the core of who we are. But at the heart of who we are is a promise. A promise to take care of our customers. In the end, that is what we sell. We work hard to make sure our agent and broker partners are proud to sell that promise and our customers are happy that they bought it.
The power of the core and the heart, and the inextricable link between them, were on full display this year. In crisis after crisis, we followed right behind the first responders who heroically saved lives, and we restored hope and rebuilt livelihoods. Through the expertise, sheer grit and determination of committed Travelers employees, our work resulted in many thousands of homes rebuilt, businesses reopened and cars back on the road. Customers of ours in Texas and Florida were able to celebrate the holiday season in their own dining rooms and living rooms because they bought a Travelers insurance policy.
Our promise extends beyond taking care of our customers. It also means taking care of our communities and each other, our Travelers colleagues, because building a successful and sustainable business depends on all three.
It is the core and heart together — taking care of all our stakeholders — that enable us to deliver on our mission of creating shareholder value. And it is only by delivering on that mission that we will be able to continue to invest in maintaining a healthy core and to make good on our promise. It is a virtuous cycle, and all the elements were on full display in 2017.
As we look back on a year in which Travelers rose to the occasion and look ahead to the opportunities and challenges on the horizon, I am enormously grateful for the counsel and commitment of our Board of Directors, the dedication and passion of every Travelers employee, the partnership and insight of our agents and brokers, the customers we are privileged to serve and the support of our shareholders.
Chief Executive Officer
At and for the year ended December 31.
Dollar amounts in millions, except per share amounts.
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.
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