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Travelers Q4 profits rise 13% despite cat losses

Posted On: Jan. 22, 2019 11:21 AM CST

Travelers Q4 profits rise 13% despite cat losses

Travelers Cos. Inc. reported higher profits in the fourth quarter of 2018, but its results remain under pressure from significant catastrophe losses.

The New York-based insurer reported net income of $621 million for the fourth quarter of 2018, a 12.7% increase from the $551 million reported in the same period of 2017, according to the insurer’s earnings statement released on Tuesday.

Catastrophe losses remained an ongoing challenge for the insurer with $453 million in pre-tax losses in the fourth quarter caused by the November California wildfires, which have led the insurer to start implementing changes to its terms and conditions and restrict its underwriting in affected areas, and $158 million in losses related to Hurricane Michael in October, Travelers officials said during the insurer’s earnings conference call on Tuesday.

“The industry has experienced an elevated level of catastrophe losses in recent years,” Daniel Frey, Travelers chief financial officer, said during the earnings call. “In response, we have updated our actuarial model to reflect the actual results of recent years and to give more weight to recent years when determining our view of normal expectations. As a result, we have recognized a somewhat higher level of expected losses in our pricing and underwriting models.”

“We had already taken action in 2017 to begin to restrict our new business underwriting appetite,” Michael Klein, president of Travelers’ personal lines division, said during the earnings call. “We’ve implemented further action that will take effect later on this quarter in 2018 to further restrict that new business underwriting appetite and also to instill new business underwriting procedures, for example, inspections around defensive space. We’ve also discussed with the Department of Insurance in California and begun to implement some non renewal action in the state of California to address some of the more significant wildfire exposures in the portfolio and we are also in discussions with the department about a filing to increase prices for homeowners in California.”

In response to the recent weather activity and ongoing uncertainty, the insurer also added a new catastrophe excess-of-loss aggregate treaty for 2019, in addition to renewing its existing treaty, Mr. Frey said.

The new property aggregate catastrophe excess-of-loss reinsurance treaty covers the accumulation, from dollar one, of qualifying losses from PCS-designated catastrophe events in North America for which the insurer incurs losses of $5 million or more per event: 86% – $430 million – of qualifying losses are covered and 14% – $70 million – of qualifying losses are retained by the insurer part of $500 million in excess of a $1.3 billion retention, according to the earnings report. Coverage for, and contributions to the $1.3 billion retention from, hurricanes and earthquakes are limited to $250 million per event.

“We believe this new treaty provides a reasonable level of protection at an appropriate price,” he said.

The insurer renewed its corporate catastrophe excess-of-loss reinsurance treaty, which covers the accumulation of certain property losses arising from one or multiple occurrences: 75% – $1.5 billion – of qualifying losses are covered while 25% – $500 million – are retained by the insurer part of $2.0 billion excess of $3.0 billion, according to the report. Qualifying losses for each occurrence kick in after a $100 million deductible.

Net income for full year 2018 was $2.5 billion, a 22.7% increase from the $2.1 billion reported in 2017, according to the statement.

Travelers booked a $129 million charge related to the passage of the Tax Cuts and Jobs Act of 2017 in its fourth quarter earnings for 2017, but Travelers officials expressed optimism at the time about the level playing field created for U.S. insurers compared to foreign insurers from the tax code revamp and the insurer reported that core income benefitted from a lower U.S. corporate income tax rate in 2018.

The insurer’s combined ratio in the fourth quarter deteriorated by 2 percentage points to 97.5% compared to the same period in 2017, but improved by one percentage point to 96.9% for full year 2018, according to the report.

Net written premium growth in the fourth quarter of 2017 grew 4.2% to $6.7 billion while net premium for the full year rose 5.7% to $27.7 billion in 2017, according to the statement.

Underlying underwriting gains in 2018 were adversely impacted by higher loss estimates in the insurer’s domestic commercial automobile line for bodily injury liability coverages as an increase in attorney involvement and lengthening of claim development patterns led to higher-than-anticipated severity, according to the statement and Travelers officials.

“Commercial auto has been a challenge for the industry and for us for some time and our most recent data reflects further deterioration,” Alan Schnitzer, Travelers chairman and chief executive officer, said during the earnings call.

Greg Toczydlowski, president of the insurer’s business insurance division, said during the earnings call, that “the auto line is where we’ve been getting the most rate over the last couple of years, but we need more of it.”

Workers compensation, the insurer’s largest line of business, had better-than-expected loss experiences for multiple accident years, according to Travelers.

“Workers compensation has been under some pricing pressure, but completely rational given where the profitability of the line has been,” Mr. Schnitzer said, adding that “the profitability continues to be good and, generally speaking, we would expect continued pressure in the comp line.”