Small business insurance leader Travelers Companies is well-positioned to continue to compete in the small commercial insurance space that is attracting new entries including technology-driven start-ups, according to CEO Alan Schnitzer.
“We think we are where we need to be to be competitive. We’re not flat-footed; we’ve been thinking about this for many years,” he told analysts on a second quarter results call today when asked if his firm is prepared to compete with more large carriers and tech-driven start-ups getting into the small business segment.
Schnitzer cited in particular his company’s pending acquisition of Simply Business, a United Kingdom-based small business technology platform, as an example of the insurer doing what it needs to do to defend its leading position in the small business segment and compete into the future. The $490 million acquisition is expected to close in the third quarter,
“This is nothing we stumbled across. It is the result of planning and being strategic,” he said.
The small business market has always been competitive, he said, while suggesting that some of the tech-driven competition is more rhetoric than reality at this point. He questioned how much business is actually currently being transacted on platforms offering a policy after just a few clicks. He said much of this competition appears to be “aspirational” but stressed that Travelers is “aspiration” as well and operates with certain advantages.
“We start with a great position with great technology, great talent and great data,” he said, adding that his company is “not standing still” but is making the investments it needs to compete.
In earlier comments on the second quarter results, he said Travelers remains “highly focused on innovation and leveraging the power of technology in every aspect” of its business.
Second Quarter Results
The insurer reported its second quarter results including net income of $595 million compared to $664 million in the prior year quarter due to lower core income, partially offset by higher net realized investment gains.
Core income in the current quarter was $543 million compared to $649 million in the prior year quarter due to lower net favorable prior year reserve development, higher catastrophe losses and a lower underlying underwriting gain, partially offset by higher net investment income.
According to the insurer, the underwriting gain declined due to the timing impact of higher loss estimates in personal auto bodily injury liability coverages that were consistent with the higher loss trends recognized in the last half of 2016 and higher non-catastrophe weather-related losses.
Net realized investment gains of $80 million pre-tax in the current quarter, compared to $19 million pre-tax in the prior year quarter, were primarily driven by gains on the sale of equity securities.
Second quarter core income of $543 million and core return on equity of 9.5 percent were impacted by high levels of catastrophe and non-catastrophe weather-related losses caused by significant U.S. tornado and hail activity. The storm activity had the greatest impact on home and auto businesses.
The overall combined ratio for the quarter of 96.7 included 6.4 points of catastrophe losses.
In commenting on the results, CEO Schnitzer said that within personal auto, the actions the insurer has undertaken to improve profitability remain on track. Auto renewal premium change was 8 percent, consistent with plans to improve profitability. He said the firm expects that number to reach double digits by the end of the third quarter. In homeowners business, policies in force grew by 4 percent year-over-year.
Schnitzer said he is pleased with results in commercial businesses this quarter. In Business Insurance, segment income was up 7 percent and the underlying underwriting gain improved. In Bond & Specialty Insurance, while segment income was lower than in the prior year quarter, the decrease was entirely due to lower net favorable prior year reserve development. Retention levels remained at historic highs in commercial lines, while renewal premium change improved from recent quarters. The core middle market business achieved rate increases more broadly across the portfolio as compared to recent quarters.
Consolidated net written premiums of a record $6.64 billion were up 5 percent over the prior year quarter.
The company continued to find its homeowners line to be profitable and reported progress on improving its auto business.
According to Brian Maclean, president and chief operating officer, speaking on today’s analyst call, suggested one key to improving personal lines is focusing on rounded accounts, meaning writing both auto and home or writing auto with other lines. Also, he said Travelers is emphasizing “distribution management,” working with agents to make sure they are giving the insurer its “fair share of business that goes with the auto” it does write.
Income for Personal Insurance segment of $12 million after-tax was significantly impacted by catastrophe and non-catastrophe weather-related losses. The decrease of $83 million was primarily driven by a lower underlying underwriting gain and higher catastrophe losses, partially offset by higher net investment income. The underlying underwriting gain declined due to higher non-catastrophe weather-related losses and the timing impact of higher loss estimates in auto bodily injury liability coverages that were consistent with the higher loss trends recognized in the last half of 2016.
Net written premiums of $2.498 billion increased 8 percent, about half of that due to rate increases. Agency Automobile net written premiums growth of 14 percent benefited from the impact of auto rate increases and an increase in policies in force of 11 percent from the prior year quarter. Agency Homeowners net written premiums grew 4 percent, with an increase in policies in force of 4 percent from the prior year quarter. Retention remained strong despite rate increases.
Personal Insurance underwriting results:
- The combined ratio of 104.1 increased 6.3 points due to a higher underlying combined ratio (4.3 points), higher catastrophe losses (1.8 points) and no net prior year reserve development compared to net favorable prior year reserve development in the prior year quarter (0.2 points).
- The underlying combined ratio of 94.5 increased 4.3 points, primarily driven by normal quarterly variability in non-catastrophe weather-related losses, the timing impact of higher loss estimates in auto bodily injury liability coverages, and the tenure impact of higher levels of new business in auto, partially offset by a lower expense ratio.
Business Insurance income for the quarter was $429 million after-tax, an increase of $28 million, primarily driven by higher net investment income and a slightly higher underlying underwriting gain, partially offset by higher catastrophe losses. Net written premiums of $3.544 billion increased 2 percent and benefited from continued strong retention and improved renewal premium change.
Business Insurance underwriting results:
- The combined ratio of 96.5 was consistent with the prior year quarter.
- The underlying combined ratio of 94.8 improved 0.5 points due to a lower expense ratio.
- Net favorable prior year reserve development primarily resulted from better than expected loss experience in the company’s domestic operations in the workers’ compensation product line for multiple accident years, the commercial multi-peril product line for liability coverages for multiple accident years and the general liability product line (excluding an increase to environmental reserves) for both primary and excess coverages for multiple accident years. These factors were partially offset by a $65 million pre-tax increase to environmental reserves.
Bond & Specialty
Bond & Specialty Insurance segment income was $163 million after-tax, a decrease of $52 million, due to lower net favorable prior year reserve development. Net written premiums of $598 million grew 5 percent from the prior year quarter and benefited from strong retentions and higher renewal premium change in the domestic business, as well as increases in management liability in the United Kingdom and contract surety in Canada.
Bond & Specialty underwriting results:
- The combined ratio of 68.7 percent increased 14.2 points due to lower net favorable prior year reserve development (14.9 points), partially offset by a lower underlying combined ratio (0.4 points) and lower catastrophe losses (0.3 points).
- The underlying combined ratio remained very strong at 82.0.
- Net favorable prior year reserve development resulted from better than expected loss experience in the company’s domestic operations in the general liability product line for accident years 2012 through 2015.
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