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Higher auto losses a partial byproduct of Travelers' top-line success

regainedmore lost ground in its agency automobile business during the second quarterthough elevated losses, in part owing to the relative influx of new business,served as something of a distraction to the growth story.

Theagency auto combined ratio of 101.3% marked an increase from 96.5% in theyear-earlier period, and represented the highest such result Travelers has reportedsince the fourth quarter of 2013. It was the third time since the start of 2013that the agency auto combined ratio topped 100%.

Catastrophelosses, primarily arising from hail storms, added 2.7 percentage points to thesecond-quarter agency auto combined ratio, but the underlying ratio of 98.6%still amounted to the business's highest result in 10 quarters. The agency autoloss and loss-adjustment-expense ratio of 75.9% marked an increase of 5.5percentage points from the year-ago period.

Noncatastropheweather-related losses exceeded internal expectations by adding approximately1.7 percentage points to the combined ratio. Drag associated with the newbusiness Travelers is bringing onto the books through its Quantum Auto 2.0program also had the effect of pushing the combined ratio higher.

Presidentand COO Brian MacLean said during a conference call that the insurer continues to see strongnew business and retention levels in the agency auto business as he describedagent and customer receptivity to Quantum 2.0 as "exceptional."

Agencyauto gross premiums written increased by 14.4% in the second quarter and 13.9%for the first half of 2016 to $1.02 billion and $1.96 billion, respectively.Travelers continued to experience acceleration in agency auto policies in forceduring the second quarter. At nearly 2.28 million, agency auto policies inforce increased by 10.6% from the year-earlier period, well above the growthrate of less than 9.5% the company witnessed in the first quarter. It markedthe sixth consecutive quarter in which Travelers posted a favorable comparisonin agency auto policies in force.

Travelersreported a year-over-year decline of 12.5% in agency auto policies in force inthe third quarter of 2013, the last full quarter prior to its official launchof Quantum 2.0 in select markets. Its agency auto policy count bottomed out inthe second quarter of 2014 at approximately 1.98 million.

Travelers,which ranked as thenation's No. 10 private-passenger auto insurer in 2015 based on direct premiumswritten of $3.38 billion, increased its share of the highly competitivemarketplace during the year for the first time since 2010.

"We have been pleasantly surprised with the tractionthe product has gotten in the business and in the marketplace," said CEOAlan Schnitzer during the call. "We clearly went in with an expectationthat this would enhance growth, and we've done better than our original expectationsthere. … We're not sure where that's going to go exactly in the future, but wethink that we're going to be able to sustain some pretty decent amount ofgrowth going forward."

At the same time, he added, shorter-tenured businessresulting from the uptick in new writings "is typically not asprofitable" as longer-tenured policies.

"As we get more and more of the aging of the book, webelieve the trend should absolutely be [toward] improving profitability on thisbusiness," Schnitzer said.

MacLean said that Quantum 2.0 "continues to meet ourfinancial expectations."

Travelers reported $231 million in agency auto new businessduring the second quarter, up 20.9% from the year-ago period and the highestdollar amount of new business production the segment has produced in anyquarter in at least the past seven years. The year-over-year rates of increasein new business have slowed since peaking at more than 102% in the thirdquarter of 2014, however. Year-over-year comparisons were last unfavorable inthe third quarter of 2013, which concluded a 10-quarter stretch in which agencyauto new business consistently declined.

The momentum appears to have carried over to the agencyhomeowners and other segment where new business production of $133 million inthe second quarter marked an increase of 17.7% from the year-earlier period andrepresented the highest dollar amount posted by the company since the thirdquarter of 2010.

Regarding the noncatastrophe weather losses, Schnitzercautioned against reading too deeply into the second quarter's result.

"Weview the noncat weather as episodic, so we think that should absolutely returnto normal levels," he said.

Butthe drag from new business may continue to play out over a longer period oftime.

"Wefeel great that we are building real embedded value in that portfolio,"Schnitzer said. "But … the stronger the production [on the] top line is,the longer it is going to take for that to really work through the loss ratio."