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Cat losses push Travelers’ profits lower

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Travelers Cos. Inc. reported sharply lower profits in the third quarter of 2017 amid significantly higher hurricane and other catastrophe losses, with the company expecting additional impacts this year from the California wildfires. 

The New York-based insurer reported net income of $293 million for the third quarter, a 59.1% drop from the $716 million in profits in the same period in 2016, a decline driven by the $700 million pre-tax, or $455 million after-tax, of catastrophe losses Travelers experienced in the quarter, according to the insurer’s earnings statement released on Thursday. 

Net income for the first nine months of 2017 was $1.5 billion, a 27.3% decline from the $2.1 billion reported during the same period last year, according to the statement. 

Catastrophe losses resulted primarily from hurricanes Harvey, Irma and Maria, as well as wind and hail storms in the southern region of the United States, the company stated. 

“The fact that we made a considerable profit in one of the costliest hurricane seasons on record demonstrates the earning power of our franchise, which is built on a strong foundation of underwriting and investment expertise,” Chairman and Chief Executive Officer Alan Schnitzer said during the insurer’s earnings conference call on Thursday morning. “Our catastrophe losses were well within what we would expect from the events in the quarter.” 

Travelers was “well positioned for the very real possibility of $150 billion industry event” had Irma maintained the track toward Miami and up the East Coast of Florida projected 48 hours before the storm made landfall, he said. 

The combined ratio of 103.2% in the third quarter includes 10.7 points of catastrophe losses and represents a deterioration from the 92.9% combined ratio during the third quarter of 2016, according to the statement. The combined ratio for the first nine months of the year worsened by 5.9 points to 98.7% from 92.8% during the same period last year. 

“There’s been no lack of speculation around the outlook for pricing in the wake of an unprecedented hurricane season, which still has six weeks to go, and in the midst of an ongoing, unprecedented wildfire season in California,” Mr. Schnitzer said. “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’s not hard to make the argument that we’ve experienced both — by some estimates, 10% or more of industry surplus and counting.”

Chief Financial Officer Jay Benet said the insurer will be watching the California wildfires, “which we expect will be a significant cat for us” as it evaluates share repurchase activity through the fourth quarter. 

In addition to the hurricanes and California wildfires, Mr. Schnitzer cited the earthquakes in Mexico and the Equifax cyber event — without naming the company directly — as major events in recent months.  

“While those events have understandably captured everyone’s attention, that’s only part of the story,” he said. “Interest rates remain at historically low levels. Loss trends have outpaced rate and exposure for a few years now to a degree that many others in the industry are probably not earning their cost of capital.” 

The insurer has been discussing efforts to improve renewal rate change and “for more than a year now, we’ve been making incremental, but steady progress,” Mr. Schnitzer said. “We’ll seek rate thoughtfully and in close coordination with our distribution partners.”

The company experienced record net written premiums of $6.7 billion, up 4.2% over the prior year quarter, amid strong retention in all three of its business insurance, personal insurance and bond and specialty insurance divisions, improved renewal premium changes in its personal insurance unit and an increase in new business in its commercial businesses, according to the statement.

Net written premiums for the first nine months of 2017 were $19.8 billion, a 4.7% increase over the $18.9 billion in the same period last year, according to the statement. 

Mr. Schnitzer also expressed support for the federal tax reform framework released in September, which calls for a broad simplification of the tax code, including ending taxation of U.S. companies’ worldwide income, moving to a territorial system, where companies would not be taxed on their overseas earnings, and eliminating the corporate alternative minimum tax. The corporate tax rate would also be reduced to 20% from the current 35%.

“As a country, addressing the corporate tax rate is important for enabling U.S. businesses to compete more effectively at home and abroad against our foreign counterparts,” Mr. Schnitzer said. “Beyond just the tax rate, we were particularly pleased to see that the ‘Big Six’ framework for tax reform promotes leveling the playing field between U.S. and foreign companies. In addition to contributing to the country’s tax base, it’s important in addressing the decades-long streak of U.S.-based companies losing U.S. market share and American jobs to offshore companies.”