Solid results from Travelers but bad news for risk managers on outlook

Further bad news for risk and insurance managers in the US and worldwide came from leading US insurer Travelers, as it reported a solid set of third-quarter results boosted by the continued hard market in commercial insurance and a “pure” renewal rate of change of 5%, higher than in the first half. The core message is that the market is not even flattening but rather hardening further, particularly in property lines, against the backdrop of huge losses from hurricane Ian and an acceleration in catastrophe reinsurance rates and the knock-on effect in the primary market. Travelers itself is in a decent position as it is not reliant on reinsurance, so can set its own terms and conditions. But the carrier’s leadership said during the conference call with analysts that the outlook for the commercial insurance market remains healthy and, in terms of rate and retention at a segmented level, continues to be “exceptional”. The group’s bond and specialty business also reported healthy growth on the back of strong rates and retention levels also helping to overcome the negative impact of cat losses on the third-quarter figures. The headline figures for the third quarter of this year were solid. The consolidated combined ratio was 98.2% and underlying combined ratio 92.5%. Catastrophe losses were $512m pre-tax compared to $501m pre-tax in the prior year quarter – not bad given the lively quarter. The group reported record net written premiums of $9.198bn, up 10% compared to the prior-year quarter. Net written premium growth was reported in all three segments compared to the prior-year quarter. Business insurance was up 9%, bond and specialty insurance up 8%, and personal insurance up 13%. Total capital returned to shareholders was $722m, including $501m of share repurchases. During the discussion with equity analysts, members of the Travelers leadership were bullish, which is not usually good news for risk and insurance managers. Alan Schnitzer, chairman and chief executive officer, said of its commercial book: “Turning to the top line, thanks to excellent execution by our colleagues in the field and the strong franchise value we offer to our customers and distribution partners, we grew net written premiums by 10% this quarter to a record $9.2bn. In business insurance, net written premiums grew by 9%. Renewal premium change was very strong at an historically high 10.2%, while pure renewal rate change of 5% was higher than in the first half of the year. Retention remained very strong at 86%. And new business increased 9% in the prior-year period. Underneath the headline numbers, execution in terms of rate and retention at a segmented level continued to be exceptional.” In bond and specialty insurance, net written premiums increased by 8%, driven by excellent production in both the surety and management liability businesses. Surety net written premiums were up 18%. Management liability premiums were up 4%, driven by a renewal premium change of 9%, retention that increased to 89% and 20% growth in new business. Dan Frey, executive vice-president and CFO, commented on the expected further hardening in reinsurance conditions. “Based on what we're hearing from the reinsurance community, it sounds like the market is in for higher pricing and capacity constraints. In terms of primary carriers, that's going to impact some much more than others. For two reasons, we would expect to be less impacted than others,” he said, according to results reporting service Seeking Alpha. Frey said that because Travelers does not rely on reinsurance, it is in a strong position to take advantage of the hard market conditions. Sadly, he did not suggest that it would enable Travelers to undercut the reinsurance-reliant rest of the market. “First, as a disciplined gross line underwriter, we just don't buy that much reinsurance compared to many others. Second, we have a long track record of strong underwriting performance, consistently outperforming the industry. The upshot of those factors is that we generally expect to be able to obtain the reinsurance coverage we need at acceptable prices. Also, because we're less reliant on reinsurance, we should be less affected by price increases and capacity constraints. With less of an impact on our cost structure, we should have the option to expand our margin advantage or to reflect that cost advantage in our pricing, making us more competitive for attractive new business opportunities.” Gregory Toczydlowski, executive vice-president and president, business insurance, also did not give much hope of relief for commercial customers, as he assured investors that the focus would remain firmly on the margin. “Given our high-quality book, as well as several years of segmented rate increases and improvements in terms and conditions, we're thrilled to continue to produce historically strong retention levels. The rate gains we achieved in the quarter reflect our deliberate execution, which balanced the persistent headwinds and uncertainty in the current environment with the improvement in profitability across our portfolio after several years of strong pricing. As always, we'll continue to execute our granular pricing, careful management of deductibles, attachment points, limits, sub-limits and exclusions to maintain profitable growth,” he said. Chairman and CEO Schnitzer added that, in his view, the upward pressure on property terms and conditions would be maintained, driven by the troubled reinsurance market conditions. “Pricing is a function of rate adequacy and, given what we all expect to happen to reinsurance, there's going to be a rate need. On top of that, certainly as it relates to property, there are going to be capacity constraints that will be significant, I suspect, across the market. And I think on top of those things, which are probably largely quantifiable, [hurricane Ian] was just a big storm, maybe rivalling Katrina. And that's just going to impact the way that the market thinks about risk,” he said. “So, we would expect that constellation of factors to put certainly upward pressure on property pricing and potentially extended to other aspects of the market as well, we'll see. But certainly, as it relates to property, we would expect there to be upward pressure on pricing,” added Schnitzer.

Solid results from Travelers but bad news for risk managers on outlook

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