Travelers Underlying Underwriting Results Help Offset Higher Cat Losses

Travelers reported fourth quarter core income broadly in line with Wall Street forecasts despite higher cat losses and lower reserve releases as better underlying underwriting performance, higher investment income and a lower tax rate boosted the bottom line.

Source: The Insurer | Published on January 22, 2019

The US insurance giant also made further steady progress in achieving rate rises on its business insurance book, with an average renewal premium change of +4.8 percent recorded in the quarter.

Travelers reported core pre-tax profits (analogous to the operating profit measure typically used in analyst forecasts) of $571mn, or $2.13 a share before markets opened this morning.

The result was a drop on the $633mn, or $2.28 a share reported in the prior-year period, but in line with the $2.14 mean estimate of 22 analysts, according to

Core return on equity dipped, however, by 1.1 points to 10.0 percent compared to the prior-year quarter, with book value per share down a point through the year to $86.84.

The quarter included cat losses of $610mn before tax arising from the California wildfires and Hurricane Michael, a tally that was up from $499mn in Q4 2017.

The share of cat losses from the wildfires was $453mn before tax ($358mn after-tax) with a $158mn pre-tax ($125mn after-tax) hit from Hurricane Michael.

Profits were also adversely impacted by a decrease in net favourable prior-year reserve development of $126mn to $167mn.

The two combined to push a 2 points increase in the combined ratio to 97.5 percent, with lower reserve releases accounting for 2 points of the increase, higher cat losses 1.3 points, and a lower underlying combined ratio benefiting the overall measure by 1.3 points.

The underlying combined ratio was recorded at 91.1 percent, down 1.3 points from the 92.4 percent generated in Q4 2017.

Meanwhile, net written premiums climbed 4 percent to $6.69bn for the quarter with strong growth in all segments, said Travelers.

Net investment income also helped the bottom line with an increase of 5 percent to $630mn before tax, driven by the impact of higher interest rates on the insurer’s fixed income portfolio.

By operating segment, business insurance and personal lines underwriting results unsurprisingly bore the biggest burden of cat losses in the quarter.

Business insurance edged to an underwriting gain of just $7mn (Q4 2017: $399mn) as it took $197mn of cat losses, with a combined ratio of 99.4 percent that deteriorated from 88.6 percent.

In personal insurance there was an underwriting loss of $86mn driven by $406mn of cat losses, albeit that the performance compared favourably to the $227mn underwriting loss reported in Q4 2017.

The division’s combined ratio actually improved by 6.1 points to 102.6 percent.

Travelers’ third main operating division bond and specialty insurance increased its underwriting gain from $94mn to $214mn for the quarter, as its combined ratio improved by 18.9 points to 64.8 percent.

Consolidated net income for the quarter was 13 percent higher at $621mn. The measure in the prior-year quarter included the impact of a $129mn charge related to Trump administration tax reforms.

As well as operating results, analysts are likely to focus on continued rate increases in business insurance pricing at the insurer, which is often viewed as a bellwether for the sector, given its size and early reporting.

The average 4.8 percent increase in renewal premiums seen in the fourth quarter continued a positive trend throughout 2018, matching the 4.8 percent uplift of Q1 which was followed by 5.5 percent in Q2 and 5.3 percent in Q3.

Select accounts delivered a 5.6 percent increase, compared to 5.2 percent in Q2 and Q3, and 4.7 percent in Q1.

The insurer’s middle market book reported renewal premium change of +4.5 percent, down on the 5.2 percent and 4.8 percent seen in the second and third quarters respectively, but ahead of the 4.3 percent recorded in Q1 last year.

Travelers continued its strategy of active capital management in the quarter, repatriating $375mn to shareholders, including $170mn of share repurchases.

That took the total capital returned to shareholders for the year to $2.14bn, including $1.32bn of share buybacks.