Travelers reported Q4 operating EPS of $1.48 vs. SNL consensus estimates of $1.54. But as was the case last quarter, the big question is the progress of potential price increases. And this quarter, we see some progress on both renewal and new business pricing. While new business pricing is still down, it appears to be down less than last quarter. This is an important metric to gauge the health of any emerging pricing cycle.
It was a major point of contention last quarter that Travelers was reported increasing renewal pricing, yet its combined ratio deteriorated even excluding catastrophes and reserve development. In Business Insurance, where Travelers reports sufficient data to attempt this analysis, the Q3 non-cat accident year loss ratio (AY LR) was 68.9% vs. 62.3% in Q3 2010. Although Travelers reported renewal premiums increases of 4%, the implied underlying new business price change could have been a decrease of as much as 40%.
This quarter looks much better, and Q3 looks more like a fluke. We have attempted the same analysis, using Travelers supplements and disclosures, for both 2011 Q4 and the full year.
| Business Insurance | Q4 | Full Year | Source | ||
| Accident Year Non-Cat Loss Ratio: | |||||
| 1) | 2010 | 64.5% | 63.4% | Release | |
| 2) | 2011 | 65.3% | 66.3% | Release | |
| 3) | Real Price Change | -1.2% | -4.4% | (1)/(2)-1.0 | |
| 4) | Assumed Loss Trend | 3% | 3% | S&SR assumption | |
| 5) | Nominal Price Change | 1.7% | -1.5% | [1.0+(3)]x[1.0+(4)]-1.0 | |
| 6) | Renewal Rate Change | 6.0% | 3.0% | Release | |
| 7) | Retention | 79% | 82% | Release | |
| 8) | New Business Rate Change | -14% | -22% | [(5)-(6)x(7)]/[1.0-(7)] | |
| Sources: Company Reports, Sector & Sovereign Research Analysis | |||||
The headline result for Q4 was 6% average renewal pricing across Business Insurance, with pockets as high as 8% in Commercial Accounts, for example. But unless one is in a raging hard market, it is usually the case that new business will get a decrease on average. That was still the case in Q4, but the results look better than Q3, and trend over the year looks good. We estimate about a 14% new business price decline, averaging to a Q4 total nominal price change (new and renewal) of 1.7%. The was an improvement over the full year, where assuming an average renewal price change of 3%, we get an implied new business price decrease of -22%, and -1.5% total price change. So the average price change across all business in Q4 is 3 points better than the full year 2011. That’s a big improvement.
Keep in mind that this analysis is rough, but hopefully reasonable. The 3% assumed loss trend is a plug. We have no ability to adjust for large losses or other distortions. And the numbers we are pulling off of various Travelers graphs themselves are estimates. Still, the direction of change looks good. Travelers believes they will begin to see underwriting margin improvement in the first half of 2012, and we think this more likely that we would have 12 month ago. Until and unless our forecast for re-emergence of favorable prior year development occurs, the trend looks to be for higher pricing near-term.