Travelers Q1 Profit Up 11% to $896M; CEO Says ‘We Will Keep Going’ on Rate Hikes

April 24, 2013

The Travelers Companies Inc. on Tuesday reported $896 million net income for its 2013 first quarter, an increase of 11 percent compared to $806 million income reported during the first quarter of 2012.

Travelers said the improvement in both net and operation income can be attributed to higher underlying underwriting margins and lower catastrophe losses — which more than offset lower net investment income and lower net favorable prior year reserve development.

Travelers said written rate gains continued to exceed expected loss cost trends in all segments. The company reported renewal rate change of 8 percent in Business Insurance, including nearly 10 percent in Commercial Accounts.

The company said renewal rate gains continued in all segments and retention rates remained strong and generally consistent with recent quarters. New business volumes in Business Insurance increased from the prior year quarter but decreased in Financial, Professional & International Insurance and Personal Insurance.

Overall net written premiums for the quarter came in at $5.597 billion, up 2 percent from $5.497 billion one year ago. The operating income for the quarter was $887 million, up 11 percent from $801 million one year ago.

The GAAP combined ratio for the first quarter was 88.5 percent, improving 3.7 percentage points from 92.2 percent posted during the 2012 first quarter.

The overall underwriting gain for the first quarter was $385 million, up 55 percent from $248 million a year ago.

The 2013 first quarter catastrophe losses, net of reinsurance, was $65 million, compared to $109 million catastrophe losses during the 2012 first quarter.

Net favorable prior year reserve development was $154 million for the quarter, down 23 percent from $200 million one year ago.

Net investment income was $542 million, a 8.6 percent decline compared to $593 million one year ago, as the low interest rate environment continued to affect investment results.

Travelers CEO Jay Fishman said latest results represented the company’s “highest quarterly operating income per diluted share since Travelers’ initial public offering in 2002.”

“Operating income of $887 million and operating return on equity of 15.8 percent reflect continued improvement in our underlying underwriting margins primarily due to the pricing and underwriting actions we have taken across all segments,” CEO Fishman said. “Our high quality investment portfolio continued to perform well — with returns modestly declining in line with our expectations given continued low interest rates.

Commenting on business insurance pricing, Chief Operating Officer Brian MacLean said during the conference call that the renewal premium change was driven by pure rate increases of 8 percent as well as exposure of more than 2 percent. Overall retention was in line with recent quarters at 80 percent and new business volume was up slightly compared to recent quarters, he said.

“Rate gains we achieved in the first quarter were up slightly from both the previous quarter and the 2012 first quarter. Rate increases ranged from 6 percent to 10 percent across all lines and were once again led by workers’ comp and commercial auto,” MacLean said.

In Personal Insurance, MacLean said Travelers continues to be “very pleased” with both pricing and retention for its personal auto insurance — with a renewal premium change of almost 9 percent while retention was at 81 percent — both in line with recent periods. However, new business volume for personal auto was down compared to one year ago, he said.

“What these results demonstrate is that we have been successful in achieving rate increases on the renewal book. But our pricing action has meaningfully impacted our new businesses. And we are watching this trend carefully,” he said regarding personal auto results.

In homeowners insurance, he said pricing was also strong, with the renewal premium change of 12 percent. Retention was at 84 percent. Still, the new business volume was “meaningfully lower” compared to a year ago because of the company’s pricing, underwriting and deductible strategy, he said.

CEO Fishman Cites Unpredictable Weather, Low Interest Rate

Commenting on price increases, CEO Fishman said that while he can’t speak for the industry or any other company, “I can tell you what we are doing. We are going to continue.”

Fishman said the rate hikes are being driven by two factors. First, he said, the weather remains unpredictable and more uncertain than it has been in the past. “The weather remains unpredictable and uncertain. So we are going to keep going,” he said.

And second, as the company’s investment portfolios mature, the low interest rates will continue to push down the fixed income portion of net investment income over the next few years — unless the interest rates change.

Update on Superstorm Sandy Losses

Travelers also gave an update on its Superstorm Sandy losses. The company’s latest estimate of total losses is now $1.01 billion, which is down $13 million from the previous loss estimate offered during the 2012 fourth quarter.

Additionally, Travelers also said during the conference call that claims from the Boston bombing and the fertilizer plant explosion in West, Texas, would not be meaningfully costly for the company.

“No doubt, someone will ask about the cost of the events in Boston or in West, Texas. While right now we don’t expect either event will be meaningfully costly to us, my real answer is that the human cost is stunning. And we are reminded of the fragile nature of the world in which we live,” CEO Fishman said during the conference call. “Our sympathies go out to everyone affected in these horrific events. We will do all we can to help them in the recoveries. As we are reminded of Sept. 11, we wish only the best for the folks in Texas and embrace fully the sentiment of Boston Strong.”

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