Travelers Reports Q2 Loss on Catastrophes, Investments; Only Modest COVID Impact

July 23, 2020

The Travelers Companies reported a net loss of $40 million for the quarter ended June 30, 2020, compared to net income of $557 million in the prior year quarter. The insurer said the difference was primarily due to higher catastrophe losses, lower net investment income and lower net favorable prior year reserve development, partially offset by a higher underlying underwriting gain.

The insurer said COVID-19 and related economic conditions produced a modest net loss of about $50 million in the quarter, reflecting increases in COVID-related workers’ compensation and business insurance claims that were somewhat offset by reductions in auto claims and traditional workers’ compensation.

Net realized investment gains in the current quarter were $13 million pre-tax, compared to net realized investment gains of $25 million pre-tax in the prior year quarter.

The combined ratio of 103.7 increased 5.3 points largely due to higher catastrophe losses (7.0 points).

Net written premiums of $7.346 billion decreased 1%. Excluding premium refunds provided to personal automobile customers in response to COVID-19 and related economic conditions, net written premiums increased 2%.

Travelers on Impact of COVID-19 and Related Economic Conditions

Beginning in March 2020 and continuing through the second quarter, Travelers says the global pandemic and related economic conditions impacted its results of operations in these ways:

  • Earned premiums were negatively impacted by premium refunds in Personal Insurance provided to personal automobile customers. In Business Insurance, earned premiums were negatively impacted by reduced exposures and reductions in the company’s estimate of ultimate audit premiums receivable. Earned premiums in Bond & Specialty Insurance were not materially impacted.
  • Claims and claim adjustment expenses in Business Insurance included modestly lower loss estimates in certain product lines, primarily commercial automobile, partially offset by modestly higher loss estimates in certain other product lines, primarily commercial property. Claims and claim adjustment expenses in Bond & Specialty Insurance were negatively impacted by higher loss estimates for management liability coverages. Claims and claim adjustment expenses in Personal Insurance were favorably impacted by lower loss estimates in the automobile product line, largely due to the impact of a decrease in miles driven.
  • General and administrative expenses were modestly impacted by an increased allowance for expected credit losses on premiums receivable in all segments and higher contingent commission expense in Personal Insurance as a result of the improved profitability referred to above, partially offset by lower travel-related expenses.

In addition to the those impacts on underwriting margins, for the second quarter and first six months of 2020, the company said it also experienced the following impacts of COVID-19 and related economic conditions:

  • Other income was negatively impacted by declines in installment premium charges attributable to the impact of billing relief actions offered to customers.
  • Net investment income was impacted by a loss of $234 million in the second quarter of 2020 from the company’s other investments.
  • Net realized gains (losses) included net realized investment gains (losses) on equity securities still held of $46 million and $(33) million for the second quarter and first six months of 2020, respectively, driven by the impact of changes in fair value on the company’s equity investments attributable to the volatility in global financial markets.

Also gross claims and claim adjustment expense reserves at June 30, 2020 increased by $1.26 billion from December 31, 2019, primarily reflecting the impacts of catastrophe losses in the first six months of 2020, loss cost trends for the current accident year and reduced claim settlement activity largely due to the disruptions in the judicial system related to COVID-19.

Going forward, the company said the impacts of COVID-19 and related economic conditions on its results “continue to be highly uncertain” and outside its control. “The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate,” the insurer said.

“We were very pleased with our marketplace execution in the quarter, particularly in light of the challenging economic environment. Net written premiums declined just slightly, as the impact of the pandemic on insured exposures in our commercial businesses and our auto refund program in Personal Insurance were largely offset by strong renewal rate change in all three segments,” said Alan Schnitzer, chairman and chief executive officer, in prepared remarks prior to an earnings call with analysts.

He said that investments the company has been making in digital tools for employees, customers and agents have proven “particularly valuable” as it manages its business through the pandemic. “We will continue to invest to advance our innovation priorities and ensure that those capabilities and our other competitive advantages remain relevant and differentiating,” he said.

Catastrophe losses came in at $854 million pre-tax, compared to $367 million pre-tax in the same quarter last year. Catastrophe losses in the second quarter of 2020 primarily resulted from severe storms in several regions of the United States including a tornado in Tennessee; about $91 million in losses were attributed to civil unrest.

In its management discussion of the quarter, the company noted that on average over the last 10 years, it has experienced approximately 40% of its annual catastrophe losses during the second quarter, primarily from severe wind and hail storms, including tornadoes. Hurricanes, wildfires and winter storms tend to happen at other times of the year.

Net investment income was $268 million pre-tax, compared to $648 million pre-tax in the prior year quarter.

In connection with the emergence of PG&E Corp. and Pacific Gas and Electric Co. from bankruptcy on July 1, 2020, the Travelers expects to recognize in the third quarter of 2020 favorable prior year reserve development of approximately $400 million, pre-tax and net of expenses and reinsurance, related to the 2017 and 2018 wildfires in California.

Business Insurance

The Business Insurance segment loss was $58 million after-tax, compared with segment income of $351 million after-tax in the prior year quarter. The difference was primarily due to lower net investment income, higher catastrophe losses and no net prior year reserve development compared with net favorable prior year reserve development in the prior year quarter, partially offset by a higher underlying underwriting gain. The Business Insurance combined ratio of 107.1% increased 6.0 points, with 4.5 points due to higher catastrophe losses.

Workers’ compensation and commercial property had better than expected loss experience in the segment’s domestic operations for multiple accident years. Offsetting these lines were general liability (excluding asbestos and environmental) and commercial multi-peril with higher than expected loss experience in the segment’s domestic operations for primary and excess coverages for multiple accident years.

Business Insurance net written premiums of $3.777 billion decreased 3%. Strong retention and higher renewal rate changes were more than offset by reduced exposures and a decrease in new business volume, both impacted by COVID-19 and related economic conditions.

Business Insurance achieved renewal rate change of 7.4%, nearly 4 points higher than the prior year quarter and its highest level since 2013, while retention remained strong.

Personal Insurance

Segment income for Personal Insurance was $10 million after-tax, a decrease of $78 million. Segment income decreased primarily due to higher catastrophe losses and lower net investment income, partially offset by a higher underlying underwriting gain and higher net favorable prior year reserve development.

The Personal Insurance combined ratio of 101.3 increased 1.1 points due to higher catastrophe losses (12.5 points), largely offset by a lower underlying combined ratio (10.6 points) and higher net favorable prior year reserve development (0.8 points). The underlying combined ratio of 84.0 decreased 10.6 points, primarily driven by lower non-catastrophe weather-related losses in the homeowners and other product line and lower losses in the automobile product line due to a decrease in miles driven attributable to COVID-19 and related economic conditions (net of premium refunds).

Net written premiums of $2.835 billion decreased 1%. Excluding premium refunds provided to personal automobile customers, net written premiums increased 6%. Agency Automobile net written premiums decreased 12% due to the premium refunds. Excluding the impact of the premium refunds, Agency Automobile net written premiums increased 3%, driven by strong retention, renewal premium change of 2% and higher levels of new business. Agency Homeowners and Other net written premiums increased 13%, driven by strong retention, renewal premium change of 8% and higher levels of new business.

Bond & Specialty Insurance

Segment income for Bond & Specialty Insurance was $72 million after-tax, a decrease of $102 million. The combined ratio of 93.8 increased 18.9 points due to net unfavorable prior year reserve development compared to net favorable prior year reserve development in the prior year quarter (10.9 points), a higher underlying combined ratio (7.1 points) and higher catastrophe losses (0.9 points). Net written premiums of $734 million increased 3%, reflecting strong retention and increased levels of renewal premium change in management liability.

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