The Travelers Cos.’ earnings, one of the first major insurance earnings to be reported each quarter, are often closely observed by industry participants as a bellwether for marketplace trends. And the company’s latest quarterly results last week may reflect a deceleration in commercial lines rate increases, according to analysts.
However, Travelers said any changes in the aggregate headline rate reflect businesses moving from poor performing classes to the better performing classes, and that it doesn’t mean the rate opportunity has peaked in the commercial lines marketplace.
Travelers had a “very impressive 2013,” said the company’s Chief Executive Officer Jay Fishman during an earnings conference call on Jan. 21. The company reported $988 million net profit for its 2013 fourth quarter, more than a three-fold increase from $304 million posted a year ago. He listed several positive factors in 2013, including “dramatic improvements” in Travelers’ underlying underwriting margins over the past two years; continued contributions from prior year reserve development; and a more modest level of catastrophe losses in 2013 compared to recent years.
“I don’t think we could be more pleased than we are with these results — particularly given the challenges that our industry has been facing over the last several years, including historically low interest rates and more volatile weather patterns,” CEO Fishman said.
Travelers showed in its earnings report that its core Business Insurance segment had a renewal rate change of 5.9 percent for the 2013 fourth quarter, compared to 7.0 percent in the 2013 third quarter and 7.2 percent a year ago. (The renewal rate change represents the estimated change in average premium on policies that renew, excluding exposure changes. The figures exclude national accounts.)
The Business Insurance segment’s retention was up slightly from recent periods at 80 percent for the 2013 fourth quarter, and the renewal premium change was in line with recent periods at 8.3 percent. In comparison, the renewal premium change in the 2013 third quarter was 8.4 percent, and 8.8 percent a year ago. (The renewal premium change represents the estimated change in average premium on policies that renew, including rate and exposure changes.)
CEO Fishman said the key is to focus on the granular-level approach. “We believe that many industry observers are putting inappropriate significance on the absolute number of rate gain, particularly the headline number that is so often quoted,” he said. And while the number is interesting, it is not nearly as revealing as many believe — as the rate and retention in a much more granular basis holds the real key to success, he said.
The company also said it continues to earn rate increases in excess of loss trends in each of its business segments.
“To understand the impact of rate and retention on returns, you have to examine the detail behind how we got to the aggregate results,” said President and Chief Operating Officer Brian MacLean. “We have talked before about how we measure our business returns on a very granular basis. By business; by line; by territory; in smaller accounts; by class and in middle and large accounts down to the individual account level.”
He also said the renewal rate change for the poorer performing segmentation in Travelers’ middle-market business — which makes up about 20 percent of the company’s total middle-market premium — continues to be “all well into double digits.”
“We have been able to consistently get meaningful rate increases on the portfolio for poorer performing accounts,” he said.
MacLean also said that in the company’s view, there doesn’t appear to be a clear trend showing any real movement in the marketplace. “We believe that the fourth quarter 2013 decline in rate and increase in retention is more a function of our execution than a change in the marketplace,” he said.
He said that in Travelers’ each segmentation band, price gains continued to exceed the expected increase in loss costs and that the company continues to make progress in the accounts with the greatest opportunities to improve returns.
“We continue to execute on our strategy of improving returns. If we are successful, the aggregate headline rate will come down over time,” he said. The key is not the headline number, but instead will always be why the rate and retention figures are changing regardless of direction, and whether such changes are consistent with the company’s goal of generating mid-teens return on equity (ROE) over time, he added.
CEO Fishman said the question he asks when discussing the marketplace competitiveness is, “Do our field underwriters think that if an account in a particular class came up for renewal today versus one or two years ago, would the opportunity for a rate improvement be viewed differently by a field underwriter today than it would have then?”
“I asked the question many times in a lot of ways, and the answer I get routinely is that in the poorer performing classes, no difference at all,” Fishman said. “In the best performing classes, perhaps a little more difficult. ‘Perhaps a little more difficult’ is quite literally the words we hear.”
Travelers’ rate gains, even in the best performing classes, more than offset loss costs, he added. “The point about the headline number is that as business moves from poor performing classes to the better performing classes, by definition, the headline number is going to go down.” It would be inappropriate to make a direct conclusion that the number going down therefore means that the rate opportunity has peaked, he said.
Analysts Weigh In
Commenting on Travelers’ results, Mark Dwelle, an analyst at RBC Capital Markets, said it can be the case that the pace of commercial lines renewal rate increases are slowing and, at the same time, be the case that Travelers finds that it doesn’t need to seek as much in the way of rate increases because an increasing proportion of its book has become adequately priced due to prior rate actions.
“Raising rates for the sake of doing so invites the loss of good accounts,” Dwelle said.
“In our view this is quite reasonable and indicative of a consistent approach to maintaining underwriting profitability. A book of business shouldn’t constantly need high-single digit rate increases in an environment where loss costs average in the low-single digits,” he said. RBC Capital Markets currently provides Travelers with non-investment banking securities-related services and non-securities services.
Paul Newsome, a managing director and insurance analyst at Sandler O’Neill & Partners, added that recent surveys have been showing a deceleration of price increases in commercial insurance in the U.S.
“You saw that in Travelers’ results as well. And I anticipate you will see that in other companies as they report their fourth quarter earnings in the U.S,” he said. “And I think you are going to see a continued deceleration over the course of 2014.”
As companies like Travelers get the rate adequacy up in their book overall, smaller and smaller portions of their business will need price increases, Newsome said. “You will see lower and lower overall price increases.”
He said it’s fair to say the course Travelers has been taking is essentially the same. “They’ve largely taken a granular approach to pricing. That being said, a year ago and two years ago, there was a lot of their business that needed price increases. And therefore, they were aggressive in getting those price increases overall and more optimistic about getting them,” he said. “Now, they are clearly less optimistic about maintaining the pace of price increases.”
“I think that really just has to do with the numbers themselves,” Newsome said. “If you are granularly going through your book and if you have gotten through most of your book at an adequate rate, the math says that you will have on average lower rate increases.”
“I think they are clearly less optimistic about the pace of what the rate increases will be just simply because they are further along in getting the rate adequacy of the book,” he said.
Newsome said there is no question that Travelers is not the entire market and that what they are doing is slightly different compared to the rest of the market. “But you know, they are a huge company, and by definition, it’s a significant portion of the market,” he said. “I also think that directionally, what they are doing is being reflected in the market and they are not outside of what’s going on in the overall market.”
“I think you are going to see other companies show a further deceleration in commercial pricing for the fourth quarter,” Newsome said. “My guess is that the typical company would actually show a smaller absolute level of rate increases in the fourth quarter.”
“I don’t think the overall market was as disciplined or aggressive with their price increases as Travelers was. There are companies out there that had chosen to grow in the last couple of years and Travelers really hadn’t.”
Travelers also provided an update on its new private passenger automobile product, Quantum Auto 2.0. Travelers COO MacLean said that in the auto production, retention was 81 percent in the fourth quarter, with a 7 percent renewal premium change. And new business volume was up compared to recent periods. Net written premium was down year over year.
He said the rise in the new business volume was mostly the result of the Quantum 2.0 rollout. By the end of 2013, Travelers had launched the product in 18 states. “While we are still in the early days of the rollout, we are pleased with our execution so far. To date, in these states, we are achieving the competitive position that we had modeled — both broadly in the marketplace and specifically in comparative raters,” he said.
Commenting on Quantum 2.0, Sandler O’Neill & Partners’ Newsome said the early indications that he’s been getting from talking to brokers are largely positive. But, he said, “I think it’s too early to tell if it’s going to be a success or not.”
This is one area where Travelers may not necessarily be exactly in line with what the rest of the market is doing, Newsome said. “I think they are being more aggressive here with price declines in auto insurance than most of their peers. They are lowering commissions which, at the moment, most of their peers are not doing,” he said. “So they are doing something here that’s different from the rest of the auto insurance market. But I think it’s too early to tell whether it will work or not.”
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