Travelers’ Q3 Net Income Drops On Higher Weather Related Losses & Unfavorable Prior-Year Reserve Development

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The Travelers Companies (NYSE:TRV), one of the largest property and casualty (P&C) insurers in the U.S. in terms of premium volume, reported weak earnings for the third quarter, with operating income dropping by about 23% year-over-year (y-o-y) and the combined ratio (the ratio of claims to premiums earned) increasing by 600 basis points to 92.9%. The decline in operating income was primarily due to higher non-catastrophe weather-related losses, lower net favorable prior-year reserve development, and lower investment income.  trv-13trv-14

The company’s revenues grew 2% year-over-year (y-o-y) to about $7 billion in Q3 2016. In terms of bottom line, the company’s net income per share declined by 18% to $2.45, but it was still ahead of analyst estimates of $2.42 per share for the quarter. Going forward, analysts expect revenue and EPS of $6 billion and $2.65 a share, implying a decline of 10% and 6%, respectively, over the prior year quarter’s figures.trv-15

See our full analysis of Travelers here

Business And International Insurance

The Business and International Insurance division reported revenues of $3.6 billion in the quarter, comparable to the year ago quarter and accounting for 56% of total premiums. They were driven by a 2% growth in the international market, partially offset by Specialized Distribution premiums in the domestic market. The company’s international operations include Canada, Ireland, the U.K., and Brazil, and contributed over 11% of the total premiums written in this division.

However, its operating income declined almost 16% to $457 million driven by higher catastrophe losses, higher non-catastrophe weather related losses, lower net investment income, and lower net favorable prior-year reserve deployment. The segment reported a combined ratio of 96.1%, an increase of 390 basis points on a y-o-y basis.

In the Bonds and Specialty Insurance business, operating income declined by 26% to $146 million due to lower net favorable prior-year reserve development, a higher underlying combined ratio, and higher catastrophe losses. This was reflected in the combined ratio for the segment as well, which worsened by 13 percentage points over the prior year quarter to 70.1%.

Personal Insurance

The company offers homeowner’s multiperil and personal automobile insurance products within the Personal Insurance division. The net premiums written jumped 10% y-o-y to over $2.2 billion driven by higher new business volume from the company’s Quantum Auto 2.0 and growth in the homeowner’s insurance product line. In the conference call, management added that Optima – the strategic insurance platform launched in Canada last year modeled after the U.S.-based Quantum Auto 2.0 – was receiving a positive response and is likely to help grow new business volumes significantly going forward.

Lower prior year reserve development partially offset by lower catastrophe related losses  helped worsen the combined ratio by 780 basis points y-o-y to 92.9% in Q3 2016. As a result, the division’s operating income declined 34% to 158 million in the third quarter.


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