Travelers Q2 profits rise, but tort environment deteriorating

Travelers Cos. Inc.’s profits rose in the second quarter of 2019 due to lower catastrophe losses, but company officials warned of a worsening tort environment amid continued weakness in the commercial auto sector and the impact of childhood sexual molestation claims.

The New York-based insurer reported net income of $557 million for the second quarter, a 6% increase from the same period in 2018, according to the insurer’s earnings statement released on Tuesday.

Net written premiums rose 4% to $7.450 billion in the second quarter of 2019 compared with the same period last year, according to the earnings report.

The insurer’s consolidated combined ratio for the second quarter worsened by 0.3 points to 98.4% while its underlying combined ratio declined 1.3 points to 94.9%, according to the insurer’s earnings presentation.

“Catastrophe losses were favorable while non-cat losses were worse than what we would consider a normal level for the second quarter,” Alan Schnitzer, Travelers chairman and CEO, said during the company’s earnings conference call on Tuesday. “In terms of the tort environment, the trends … impacting bodily injury severity in commercial auto have developed a little worse than we expected in the commercial auto line and while we anticipated those trends extending into the other liability coverages, they extended into the primary and excess coverages of the general liability line somewhat more than we anticipated.”

The “issues continue to be most heavily associated with commercial auto-related losses manifesting in two places: in the commercial auto line as you would expect and also in excess coverages of the general liability line where the underlying losses are auto related,” he continued. “The run rate earnings impact of this updated view of the tort environment is a little less than $20 million per quarter after tax. 

“I’ll note that unlike commercial auto where the returns are still clearly inadequate, the returns on the general liability line – both primary and excess – are much healthier for us,” he added.

In relation to the tort environment, “broadly, what we’re reflecting in our numbers (is what) we would describe as a more active and more aggressive plaintiffs’ bar,” Mr. Schnitzer said.

Net favorable prior year reserve development in the second quarter of 2019 was $123 million pre-tax, down from $186 million in the same quarter last year, according to the earnings report.

Net favorable prior year reserve development in the second quarter of 2019 totaled $71 million in the insurer’s business insurance division.

“The net favorability resulted from better than expected performance in workers comp, which improved by about $275 million,” Dan Frey, executive vice president and chief financial officer of Travelers, said during the call. “Partially offsetting the favorability in workers comp is unfavorable development of approximately $125 million in general liability for both primary and excess coverages and commercial auto.”

The officials were asked about potential margin pressure on the workers comp line amid upticks in severity.

“On the loss trend on workers comp, broadly speaking, it continues to behave well,” Mr. Schnitzer said.

The general liability product line for primary and excess coverages also includes the “modest” impact of the enactment of legislation by a number of states that extended the statute of limitations for childhood sexual molestation claims and a $60 million increase to environmental reserves, both of which impacted accident years 2009 and prior, according to the insurer’s 10-Q filing and Mr. Frey’s comments.

“The impact on our book from these legislative changes in the second quarter was much smaller than the first quarter impact from the adoption of similar legislation in New York,” he said.

On the environmental side, “it’s really a continuation of what we have seen in environmental over the last several years,” Mr. Frey said. “We do see an improving environment in terms of the number of claims that come in … the reaction here in this quarter is simply that things have not improved quite to the degree that we would have anticipated.”

Net income for the first six months of 2019 was $1.353 billion, a 13% increase from the same period in 2018, according to the earnings statement. 

Net written premiums rose 4% to $14.507 billion over the first six months of 2019 compared with the same period last year, according to the earnings report. 

The insurer’s consolidated combined ratio for the first six months of 2019 was 96.1% compared with 96.8% for the same period in 2018, according to the earnings statement.