Travelers Cos. Inc. executives cited rising litigiousness as being behind increased levels of general liability and commercial auto losses, which help drive the insurer's third-quarter earnings below expectations.
Shares in the Minnesota-based insurer were down over 7% in midday trading Oct. 22 after it reported that third-quarter core income fell year over year to $378 million, or $1.43 per share, from $687 million, or $2.54 per share. The S&P Global Market Intelligence consensus normalized EPS estimate for the quarter was $2.35.
The company also reported a third-quarter underwriting loss of $149 million, compared to a gain of $198 million last year.
Chairman and CEO Alan Schnitzer said during a conference call that general liability and commercial auto lines were impacted by "a tort environment that has deteriorated beyond our elevated expectation." He said the "heart of the issue is the higher and more aggressive level of attorney involvement in claims," and that "the bigger issue for all us is that the broken system imposes a tort tax across society."
The quarterly underwriting loss reflected $294 million of net unfavorable reserve development, compared to favorable development of $14 million in the year-ago period.
Schnitzer added, "Tort reform has been a public policy focus for us and we're stepping up our efforts."
Michael Klein, executive vice president and president of personal insurance, said a rise in noncatastrophe losses was influenced by an above-average occurrence of severe weather events in the third quarter. He said the National Oceanic and Atmospheric Administration recorded over 8,500 events in the quarter, a 28% increase compared to the five previous third quarters.
Travelers' underlying combined ratio, which strips out the effect of catastrophe losses and reserve development, rose to 94.1% from 93.0% year over year. The overall combined ratio was 101.5%, up from 96.6%.
CFO Daniel Frey said the company's first objective for the capital it generates from earnings is to invest it back into the business, adding that as Travelers grows premium volumes, it will need to retain more capital.
"To the extent we continue to grow, we would expect that over time, the amount of capital returned to shareholders relative to our earnings will be somewhat less than it otherwise would have been," Frey said.