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Wildfires, tax reform weigh on Travelers’ quarterly profit

Wildfires, tax reform weigh on Travelers’ quarterly profit

Natural catastrophes and U.S. tax reform pressured profit in the fourth quarter of 2017 for Travelers Cos. Inc., but company officials expressed overall optimism about the more level playing field created by the tax code revamp for domestic insurers.

New York-based Travelers reported net income of $551 million for the fourth quarter, a 41.6% drop from the same period in 2016 — a decline driven by $499 million pretax, or $324 million after-tax, in catastrophe losses, according to the insurer’s earnings statement released Tuesday.

Alan Schnitzer, Travelers’ chairman and CEO, called the 2017 catastrophe losses “manageable” during the company’s earnings conference call on Tuesday. Losses in the fourth quarter were driven primarily by the California wildfires, while hurricanes earlier in 2017 also pressured full-year earnings, officials said during the call.

Fourth-quarter net income also included a charge of $129 million related to the passage of the Tax Cuts and Jobs Act of 2017, according to the report. The tax reform bill, among other things, replaced the previous structure of corporate income tax rates, which had a top rate of 35%, with a 21% rate. 

“The tax rate is just one factor impacting the pricing we need to achieve in order to reach our return objectives,” Mr. Schnitzer said on the call. “Other factors, for example, include the adequacy of expiring prices, loss trends, expenses, the cost of reinsurance, the impact of claims initiatives and so on. Speaking for us, tax reform will help shrink the gap between where returns are trending and where we’d like them to be trending, but it doesn’t completely close the gap. Also, not every participant in the marketplace will benefit from tax reform, and even among those who do, the extent of the benefit varies. In short, for us, tax reform helps, but we still have ground to cover.”

The passage of U.S. tax reform had a “relatively modest impact” on the company’s fourth-quarter results, said Jay Benet, Travelers’ chief financial officer. The $129 million charge resulted mostly from the company’s revaluing of its net deferred tax asset as of the bill’s enactment date, using the new 21% tax rate, and providing for taxes on deemed repatriation of the insurer’s foreign earnings to a lesser extent, he said.

But Travelers officials expressed optimism about the level playing field created for U.S. insurers compared with foreign insurers from the tax code revamp, including with respect to mergers and acquisition activity.

“Tax reform for us and others who are similarly situated obviously just makes us a more competitive buyer relative to a non-U.S. taxpayer who previously had the benefit of some structural tax advantages,” Mr. Schnitzer said. “Those advantages have gone away, so that levels the playing field so relatively speaking we’re a more competitive buyer. What hasn’t changed … is either our lens or our propensity to do transactions. We are always looking for opportunities, both organic and inorganic, and when we can make them happen on terms that are attractive to us, we’re going to try hard to do that. We’re going to try to do deals when it improves our return profile, lowers our volatility or provides us with other important strategic benefits.”

Net income for full-year 2017 was $2.06 billion, a 31.8% decline from 2016, according to the earnings statement.

Travelers is “encouraged” by the outlook for 2018, Mr. Schnitzer said. “We’re well positioned to benefit from continued improvement in the pricing environment, the opportunities afforded by a more level playing field for domestic insurers as a result of tax reform, and the prospect of a strengthening economy.”

The insurer’s combined ratio in the fourth quarter deteriorated to 95.5% from 90% in the same quarter of 2016, while its full-year combined ratio worsened to 97.9% from 92% in 2016, according to the statement.

Net written premium growth in the fourth quarter grew 6% to $6.42 billion vs. the same quarter of 2016, while net premium for the full year rose 5% to $26.22 billion, according to the statement.


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