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Cat losses prompt Travelers’ profit decline in second quarter

Cat losses prompt Travelers’ profit decline in second quarter

Travelers Cos. Inc.’s profits declined in the second quarter of 2018 amid losses caused by natural catastrophes, with the insurer boosting its catastrophe reinsurance limits.

The insurer reported net income of $524 million for the second quarter, a 12% decrease from the $595 million in profits in the same period in 2017, according to its earnings statement released Thursday.

The insurer’s profits were adversely affected by higher catastrophe losses of $85 million, an incremental charge of $45 million associated with a few large commercial losses, primarily fire related, and an $18 million assessment from the Texas Windstorm Insurance Association related to Hurricane Harvey, Travelers said in the statement.

“These results were significantly impacted by an active tornado/hail season,” Alan Schnitzer, Travelers chairman and chief executive officer, said during the company’s earnings conference call on Thursday. “Catastrophe losses of $488 million this quarter arose out of nine storms. To give you some context, that’s around $50 million more than we would have expected.”

The insurer is monitoring the recent series of quarterly catastrophe losses that have exceeded its historical experience and expectations, he said.

“Weather and large losses unfortunately color the quarter,” Mr. Schnitzer said. “It has our full attention.”

But he noted that catastrophe losses tend to be cyclical.

“You look back over time and you have some good periods and you have some bad periods,” Mr. Schnitzer said. “We’re not going to overreact to it, but we will react to it. The first thing we’ll do is update our actuarial and weather models for the actual activity.”

Travelers increased its cat bond limit with Long Point Re III Ltd., with $500 million aggregate principal placed in May 2018 after a $300 million placement expired that month, according to the insurer’s conference call presentation. The reinsurance agreement provides coverage through May 24, 2022, for certain property losses on specified lines of business from tropical cyclones, earthquakes, severe thunderstorms or winter storms from Virginia to Maine. For the period May 25 through and including May 24, 2019, Travelers will be entitled to begin recovering amounts under this reinsurance agreement if the covered losses in the covered area for a single occurrence reach an initial attachment amount of $1.90 billion. The full $500 million coverage amount is available until such covered losses reach a maximum $2.40 billion.

The insurer also renewed its northeast property catastrophe excess-of-loss reinsurance treaty effective July 1, with $600 million part of $850 million of coverage, subject to a $2.25 billion retention, for losses arising from a single occurrence, subject to one reinstatement. Coverage is provided on all perils basis, including hurricanes, tornados, hail storms, earthquakes and winter storm and/or freeze losses and terrorism events in limited circumstances, but nuclear, biological and radiological attacks are entirely excluded, from Virginia to Maine for the period July 1, through June 30, 2019.

“While the structure of our cat reinsurance is generally consistent with the prior year, we did take advantage of the current pricing environment to increase our cat bond limit by $200 million while reducing our northeast property cat excess-of-loss treaty limit by the same amount,” Jay Bennett, chief financial officer, said during the earnings call.

Net written premiums rose 7% to a record $7.131 billion in the second quarter from the prior year quarter, reflecting growth in all segments, according to the earnings report.

The insurer’s consolidated combined ratio worsened to 98.1% in the second quarter compared to 96.7% in the same quarter of 2017, according to the report.

During the question-and-answer session, Travelers officials were asked about emerging or potential issues that could affect earnings, including asbestos-related talc litigation, amid the news that Johnson & Johnson was recently hit with a $4.7 billion verdict awarded to 22 women who claim asbestos-contaminated talc in the company's products gave them ovarian cancer – a verdict the New Brunswick, New Jersey-based pharmaceutical company has vowed to appeal.

Travelers is “always following all of the emerging issues and talc has been on our list of issues to follow for a long time,” Mr. Schnitzer said, declining to comment on particular insureds.

The insurer also noted the potential impact of new or potential regulations imposed or to be imposed by the United States or other nations, including tariffs or other barriers to international trade, in its earnings statement, but Mr. Schnitzer said the impact would likely be on short-term lines of business that the company can react to.

“There’s no sort of outsized expectations, but we’re watching it,” he said. “There’s a lot of rhetoric out there. We’re just anticipating what could happen.”

Net income for the first six months of 2018 was $1.193 billion, a 2% drop from the same period in 2017, according to the earnings statement. 

Net written premiums rose 6% to $13.955 billion over the first six months of 2018 compared with the same period last year, according to the earnings statement. 







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