Travelers 4Q16 Earnings Call Notes

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The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q4 2016 Results

Cost of capital goes up if risk free rate and borrowing costs go higher

“And so there are couples of things going on that could impact cost and capital. For example, if the risk free rate goes up, cost of equity goes up. If the tax rate goes down then our after-tax cost of borrowing theoretically goes up. There could be other things in a change in tax policy. But if you just started with those two simple assumptions, you would look at that and say, gee, if the risk free rate goes up and if the tax rate goes down, you would speculate that our overall cost of capital would go up. If our overall cost of capital went up then our return objectives would go up with it.”

Brian Maclean

Combined ratios above 100 in personal lines

“So instead of taking you to a detailed reconciliation of the quarter, it would be more productive to focus on the full year ratios. For the full year combined ratio, we had a 104.0 and the underlying combined ratio was 101.8. These were both higher than we expected and at a level that does not meet our target returns. For full year 2016 underwriting combined ratio included about 2 points from the 10-year effect that we discussed last quarter. As we said then, when you are growing your book of business, the higher levels of new business will temporarily increase the combined ratio and the impact of 10 year in the year was as we expected.”

Deterioration is because of a trend towards more severe accidents

“The deterioration is primarily driven by an increase in the trend towards more severe accidents. Some of the factors that lead us to this observation are a higher percentage of claims involving distracted driving, more accidents involving higher speeds and more accidents on highways and at intersections. This is also consistent with recent industry data. For example, the National Safety Council report of significantly higher traffic cyclicalities in 2015 and 2016, a two year trend that we haven’t seen in decades.”

We are taking action to increase rates as a response

“In response to these developments, we are taking action in the marketplace. Our primary response is to file for increased base rate. And in November and December of 2016, rate increases were implemented in 16 states, which cover about 60% of our quote volume.”

Auto is a long tail business

“we’re talking about very recent accident periods for a very long tail-line of business, so just as a perspective. At the end of 2016, we have paid less than 15% of what we believe the ultimate losses will be for auto bodily injuries. So, it’s by nature a long tail-line of business, so it takes a while to play-out. We’re looking at all of the activity that we see, both in frequency and severity of loss, cut every which way you can think of, and looking at frequency activity, incurred losses, the paid losses.”

We’re seeing another increase in the trend of severity of bodily injury

“We got to ’13 and talked about a elevated level of bodily injury, and we were hoping that that would remain pretty constant. And we went through about two year period, 2013, 2014 into 2015, where we saw very constant, again elevated levels but constant with our expectations, of what we were getting in bodily injury. In fact, 2014 has developed favorably and we continue to see that. And what we are talking about now is another increase in that trend. And we’re talking about very, very recent accident periods, and looking at the data and responding, I think pretty quickly.”