Travelers More Than Triples Profit in Q4 on Lower Disaster Losses, Higher Prices

By Noah Buhayar and Zachary Tracer | January 21, 2014

Travelers Cos., the property/casualty insurer in the Dow Jones Industrial Average, said fourth-quarter profit more than tripled as claims costs from natural disasters fell a year after Superstorm Sandy.

Net income rose to $988 million, or $2.70 a share, from $304 million, or 78 cents, a year earlier, the New York-based company said today in a statement. Operating profit, which excludes some investment results, was $2.68 a share, beating the $2.16 average estimate of 25 analysts surveyed by Bloomberg.

Chief Executive Officer Jay Fishman, 61, boosted prices after storms increased claims costs and low interest rates reduced income from bond investments. Calmer-than-average weather in 2013 helped buoy profit after Sandy, the storm that lashed the U.S. Northeast in October 2012 and caused about $35 billion in insured losses industrywide.

“That was clearly a big impact for a lot of insurance carriers,” Matt Carletti, an analyst at JMP Securities, said in a phone interview before results were announced. “This fourth quarter certainly is the other end of the spectrum.”

Travelers gained 2.3 percent to $88.50 at 7:13 a.m. in New York before the start of regular trading. The insurer’s book value per share, a measure of assets minus liabilities, rose to $70.15 at the end of December from $68.15 three months earlier.

Hurricane Season

A quiet Atlantic hurricane season in 2013 reduced catastrophe costs. Insurers shouldered $12.8 billion in claims from the costliest disasters in the U.S. last year, “far below” the $29.4 billion average from 2000 to 2012, Munich Re, the world’s largest reinsurer, said this month in a report.

Catastrophes cost Travelers $53 million before tax in the quarter, compared with $1.05 billion a year earlier, when the company faced claims from Sandy.

The combined ratio improved 17.7 points to 87.7.

Travelers’ results are often seen as a bellwether for the commercial insurance industry, because of the company’s size and early reporting date. Fishman has been among the most aggressive at pushing price increases and buying back stock to boost return on equity. He said last year that Travelers was a “no-excuses company” that would take action in the face of challenges to its profitability.

The calmer hurricane season allowed the insurer to increase repurchases in the third quarter. In October, Travelers’ board authorized an additional $5 billion in buybacks.

Full-year profit climbed to $3.67 billion from $2.47 billion in 2012. Travelers repurchased $1 billion of its own stock in the fourth quarter.

“We continue to be very pleased with the execution of our business strategies,” said Fishman. He said the company’s “active pricing strategy” improved profitability in the commercial lines business, as well as delivered “meaningful written rate gains and higher retention levels. “ Business Insurance net written premiums of $12.233 billion, a record full year level, increased three percent, primarily driven by continued increases in renewal rate change, the company said.

Fishman cited improvement in personal lines, particularly in automobile. Personal Insurance net written premiums of $1.717 billion decreased four percent. Renewal premium change remained strong, and retention rates increased from recent quarters. New personal business was higher than the prior year quarter due in part to the company’s new auto product, Quantum 2.0, which was introduced in 18 states by year-end.. Fishman said executives “are encouraged in these early days by the market receptivity” for the new product.

Financial, Professional & International Insurance net written premiums of $1.043 billion increased 29 percent as result of higher net written premiums in both bond and financial products and international lines. The company’s management liability business continued to achieve written rate gains in excess of loss trend.

On Nov. 1, 2013, the company acquired The Dominion of Canada General Insurance Co. for an aggregate purchase price of approximately $1.034 billion. Fishman said they are “on track” with the integration.

Fourth Quarter Consolidated:

Net and operating income of $988 million after-tax and $981 million after-tax, respectively, increased $684 million and $703 million, primarily due to lower catastrophe losses.

Underwriting results for fourth quarter:

  • The GAAP combined ratio improved 17.7 points to 87.7% due to lower catastrophe losses (17.8 points) and higher net favorable prior year reserve development (0.4 points), partially offset by lower underlying underwriting margins (0.5 points).
  • Net favorable prior year reserve development occurred in all segments. Catastrophe losses primarily resulted from wind and hail storms in the Midwestern United States and Storm Xaver in the United Kingdom.
  • The underlying GAAP combined ratio increased 0.5 points to 91.2% as Business Insurance improved while Personal Insurance and Financial, Professional & International Insurance were negatively impacted by higher levels of non-catastrophe weather-related losses and non-weather related property losses.

Net investment income of $562 million after-tax ($702 million pre-tax) increased modestly primarily due to higher private equity and real estate partnership returns in the non-fixed income portfolio, partially offset by lower reinvestment rates in the fixed income portfolio.

Net written premiums of $5.633 billion increased 5% primarily due to the inclusion of Dominion within Financial, Professional & International Insurance, as well as higher net written premiums in Business Insurance. These increases were partially offset by lower net written premiums in Personal Insurance.

Full Year 2013 Consolidated:

Net income of $3.673 billion after-tax increased $1.200 billion or 49%, primarily due to higher operating income. Operating income of $3.567 billion increased $1.126 billion, primarily reflecting improved underwriting results driven by lower catastrophe losses, a higher underlying underwriting gain, a $63 million benefit resulting from the resolution of prior year tax matters and a $59 million after-tax ($91 million pre-tax) gain from the settlement of a legal proceeding. These improvements were partially offset by lower net investment income and lower net favorable prior year reserve development.

Underwriting results for 2013:

  • The GAAP combined ratio improved 7.3 points to 89.8% due to lower catastrophe losses (5.7 points) and higher underlying underwriting margins (2.1 points), partially offset by lower net favorable prior year reserve development (0.5 points).
  • Net favorable prior year reserve development occurred in all segments. Catastrophe losses primarily resulted from tornado, wind and hail storms in several regions of the United States.
  • The underlying GAAP combined ratio improved 2.1 points to 90.9%, primarily resulting from earned rate increases exceeding loss cost trends in each segment.

Net investment income of $2.186 billion after-tax ($2.716 billion pre-tax) decreased primarily due to lower reinvestment rates in the fixed income portfolio and lower real estate partnership returns in the non-fixed income portfolio.

Net realized investment gains of $106 million after-tax ($166 million pre-tax) increased primarily, due to an $87 million after-tax ($134 million pre-tax) gain in the second quarter related to a short position in U.S. Treasury futures contracts. The company closed this position by the end of the second quarter.

Net written premiums of $22.767 billion increased 1%.

 

 

 

 

 

 

 

 

 

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Latest Comments

  • January 25, 2014 at 10:26 am
    lonestar says:
    Ron, thank you for clarifying that you are a broker for high net worth homeowners. If you has simply mentioned that you are a broker, we would not have believed you. :)
  • January 24, 2014 at 1:43 pm
    Ron says:
    lonestar, I have absolutely no ties to Travelers. I am a broker for high net worth homeowners. I just found it interesting that some of those criticizing Travelers on this blo... read more
  • January 24, 2014 at 9:03 am
    lonestar says:
    Ron, I agree with you, even at first glance to some you might appear to be a Travelers rep. If some carriers decide to go to 3% commission, business 101 will take care of the... read more
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