How Is Travelers’ Combined Ratio Trending?

by Trefis Team
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Travelers (NYSE:TRV) is the sixth largest P&C insurance company in the United States, and has a market share of 3.9% on the basis of direct premiums written (per a 2018 FIO Report). The country has been witnessing substantial catastrophic events in recent years, and insurance companies are the first to take a hit. Here we analyze the combined ratio of Travelers for the past three years and make a projection on the basis of various factors.

Historical Combined Ratio

In the below chart, we observe that the company’s combined ratio increased by 5.9% in 2017 and decreased by 1% in 2018. In 2017, a 6.7% increase in loss ratio was fueled by a 16% increase in claims and claim adjustment expenses. In 2018, claims increased by only 4.7%, leading to a decline in the combined ratio. Catastrophe losses (one-time events) were significant in 2017 and had a major impact on the combined ratio.  The company reports an underlying combined ratio to effectively evaluate operational efficiency. This ratio excludes the effect of catastrophe losses and net prior year reserve development. The underlying combined ratio for 2016, 2017 and 2018 stood at 91.6%, 92.6%, and 92.5% respectively.

Historical Combined Ratio by Business Segments

In the chart below, it can be observed that the combined ratio for the Bond & Specialty segment is lower compared to the Business and Personal segments. The contribution by Business, Personal and Bond & Specialty to net earned premiums is 55%, 36%, and 9%, respectively. Accordingly, a loss in the Business and Personal insurance lines has a greater impact on the overall combined ratio.

   

Historical Catastrophe Losses

Per “Weather, Climate & Catastrophe Insight, 2018” by AON, the U.S. incurred $92 billion economic losses and $57 billion insured losses in 2018. There were peaks observed in 2005, 2012 and 2017, with economic losses of $240 billion, $153 billion and $267 billion, respectively. Consistent growth in economic and insured losses is observed since 2000. It is also reported that expected losses in the future are going to rise as population growth is happening in disaster-prone areas.

The company reports major catastrophes and associated losses separately in its annual report. An event is considered a catastrophe if an event causes losses in one segment or a combination of segments above a certain threshold. In 2017, this threshold ranged from $17 million to $30 million. In 2017, Hurricane Harvey, Hurricane Irma, and Tubbs Fire collectively caused losses of around $1 billion. Considering $2.7 billion of operating income in 2017, a major catastrophe can wipe out all the company’s profits.

Combined Ratio Forecast

By considering near-term catastrophe losses and the segment-wise distribution, we have developed an interactive dashboard Travelers’ Combined Ratio Forecast, which predicts the combined ratio for 2019, 2020 and 2021 as 94.45%, 95.64%, and 98.80%, respectively. The company in its recent Q4 earnings release emphasized the impact of catastrophe losses and plans to give more weight to recent years in actuarial models. You can change the base figures and create a What-If scenario in the dashboard.

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