The Travelers Companies, Inc. has reported an improved net income of $827 million for the third-quarter of 2020, despite elevated catastrophe and non-catastrophe weather-related losses triggering a full recovery under the firm’s Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty.
Net income improved by $431 million year-on-year in Q3 2020 as a result of higher core income and higher net realised investment gains.
At $798 million, core income increased by $420 million in Q3 2020 from the same period last year, driven mostly by net favorable prior year reserve development of $142 million in the current quarter, an improved underlying underwriting gain of $339 million, and higher net investment income of $671 million, although this was somewhat offset by an increase in quarterly catastrophe losses.
In total, catastrophe losses, net of reinsurance, increased to $397 million in Q3 2020 from $241 million in the same period last year, contributing 5.3 percentage points to the combined ratio, against a contribution of 3.3 percentage in Q3 2019.
However, were it not for the company’s use of reinsurance protection, retained catastrophe losses in the period would have been much higher, which in turn would have pushed up the combined ratio and further dampened the underwriting result.
The firm explains that catastrophe and non-catastrophe weather-related losses, including from wildfires, in Q3 2020 were reduced by the full $280 million of recoveries available under its Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty.
Catastrophe losses during the third-quarter primarily resulted from the derecho windstorm in the U.S., the Glass wildfire in California, Hurricanes Isaias and Laura, and additional wildfires in the western U.S.
Overall, Travelers’ combined ratio strengthened by 6.6 percentage points year-on-year to 94.9% in Q3 2020, driven by the aforementioned net favourable prior year reserve development against unfavourable development in Q3 2019, and a 2.6% reduction in the underlying combined ratio.
Included in the firm’s net favourable prior year reserve development is a $403 million subrogation benefit from PG&E related to the 2017 and 2018 California wildfires, as well as a $295 million increase to asbestos reserves, against an increase of $220 million in the prior year quarter.
As a result, Travelers has reported an underwriting gain of $339 million for the third-quarter of 2020, compared with an underwriting loss of $149 million in Q3 2019, and also a loss of $280 million in Q2 2020. This, combined with an investment gain of $671 million, which is up on the $622 million reported a year earlier, saw Travelers improve its net income by 109% year-on-year.
Alan Schnitzer, Chairman and Chief Executive Officer (CEO), commented: “We are pleased to report third quarter core income of $798 million and core return on equity of 13.5%, despite catastrophe losses that were well above the 10-year average for the third quarter.
“Our earnings this quarter reflect strong underlying underwriting income, resulting from record quarterly net earned premiums and an underlying combined ratio which improved 2.6 points to 91.5%. The underlying loss ratio benefited from disciplined underwriting and earned rate in excess of loss trend. The underlying expense ratio continues to benefit from our strategic focus on productivity and efficiency. Core income in the quarter also included favorable prior year reserve development, driven by our previously-announced PG&E subrogation recoveries. Our high-quality investment portfolio performed well, generating net investment income of $566 million after-tax.
“We are also very pleased with the strength of our top line, particularly in light of the ongoing challenges in the economic environment. Net written premiums in the quarter were up nearly 3%, driven by retentions that remain consistently high across all of our businesses, strong renewal rate change in all three segments and a resilient portfolio of quality accounts.”
Adding: “From a position of strength, we continue to actively pursue our innovation agenda and invest in our strategic priorities to extend our lead in risk expertise, provide best-in-class experiences to our customers and distribution partners, and improve productivity and efficiency. With our significant competitive advantages, including our highly engaged and talented workforce, we are well positioned to capitalize on opportunities and successfully grow our business as the economy continues to reopen.”