Q4 2023 Earnings Summary
- Strong pricing environment with high retention rates: Travelers reported that the pricing environment remains very strong and broad-based by any historical standard, and even with another quarter of very strong pricing, retention remains at historical highs. This indicates disciplined execution and improved returns compared to previous years.
- Favorable loss cost trends in workers' compensation: Loss costs in workers' compensation are coming in better than expected, leading to another quarter of favorable prior year reserve development. Despite some increase in paid medical severity from the very benign pandemic levels, overall frequency has been favorable.
- Favorable price versus trend in Business Insurance: The company has experienced favorable price versus trend in Business Insurance, contributing to an improved underlying loss ratio. This improvement is due to favorable pricing, a slight mix shift towards property, and modestly favorable non-catastrophe weather impacts.
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Business Insurance Margins
Q: Is the strong underlying combined ratio in Business Insurance sustainable?
A: Management believes current margins in Business Insurance are attractive and sustainable. They are pleased with the margins and the 16% growth achieved on a full-year basis. They appreciate the business they're putting on the books at these margins and see opportunities ahead.
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Return on Equity
Q: Why is ROE running below expectations despite a strong outlook?
A: The full-year ROE was 11.5%, above the cost of capital but not as high as preferred. Elevated catastrophe losses, especially in the second and third quarters, impacted underwriting contributions. Management does not expect this elevated level of catastrophe losses to continue.
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Personal Auto Loss Trends
Q: What are the loss cost trends and growth strategy in Personal Auto?
A: Loss trends in Personal Auto are moderating but remain at elevated levels. Management is cautiously optimistic and remains disciplined in ensuring rate adequacy state by state. They are pleased with increased new business production and stabilizing policies in force, planning to continue achieving rate equity and adjusting marketplace actions accordingly.
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General Liability and Umbrella Reserves
Q: How are general liability and umbrella returns given recent reserve increases?
A: Despite reserve additions in 5 of the last 7 quarters, management continues to like the returns in general liability and umbrella lines. Adjustments are modest relative to the scope of reserves, and these lines remain attractive over time.
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Workers' Compensation Trends
Q: What is the update on workers' comp medical inflation and pricing?
A: Paid medical severity in workers' comp is higher than the benign pandemic levels, but frequency remains favorable. Loss costs are better than expected, leading to favorable prior year development. Pricing is slightly negative in pure rate, but strong exposure increases act like rate due to higher wages. The environment is expected to remain steady.
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Competitive Dynamics
Q: What drives the disciplined pricing in Business Insurance despite strong returns?
A: The strong pricing environment is due to uncertainties like inflation, tight labor markets, weather, and geopolitics. While returns have improved, the industry remains disciplined, reacting to external headwinds and maintaining strong retention levels even with robust pricing.
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Fidelis Impact on Margins
Q: How does the Fidelis relationship affect margins in Business Insurance?
A: The Fidelis deal provided a modest benefit to margins in 2023 and is expected to help modestly again in 2024 with a larger base of earned premium. Management considers it a modest positive impact but is not providing specific numbers.
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Premium Growth Drivers
Q: What are the drivers behind premium growth in Business Insurance?
A: In the Select business, higher exposure in workers' comp due to wage increases among smaller customers leads to significant growth. The business owner product (CMP) with heavy property coverage also contributes to growth due to inflationary effects.
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Importance of Free Cash Flow
Q: Why is free cash flow important to the company?
A: Strong free cash flow, resulting from profitable growth, enables the company to invest in important areas, return capital to shareholders, and grow the investment portfolio. It's key to their operating model and overall flexibility.
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D&O and Cyber Pricing
Q: What are the pricing trends in D&O and Cyber lines?
A: Public D&O pricing continues to be under pressure compared to other liability lines, and the company is relatively underweight in this area. Cyber is experiencing modest negative pricing due to market perceptions of returns, but management feels positive about their execution and return profiles in these lines.