Travelers 2013 Annual Report Download - page 133

For the last several years, the Company’s results have included significant amounts of net favorable
prior year reserve development, although at lower levels in some recent years, driven by better than
expected loss experience in all of the Company’s segments. The lower level of net favorable prior year
reserve development in a number of recent periods may have been in part due to the Company’s
reserve estimation process incorporating those factors that led to the higher levels of net favorable
prior year reserve development in previous years. If that trend continues, the better than expected loss
experience may continue at these recent lower levels, or even lower levels. However, given the inherent
uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop
such that the Company recognizes higher or lower levels of favorable prior year reserve development,
no favorable prior year reserve development or unfavorable prior year reserve development in future
periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or
other changes in current period circumstances, may result in the Company revising current year loss
estimates upward or downward in future periods of the current year.
In Business Insurance, the Company expects that the anticipated impact of increases in renewal
premium changes, partially offset by consistent modest loss cost trends, and assuming weather patterns
consistent with the Company’s expectations, will likely result in underlying underwriting margins during
2014 that are higher than in 2013.
In Financial, Professional & International Insurance, the Company expects underlying underwriting
margins in 2014 will be broadly consistent with 2013 as the anticipated impact of recent underwriting
actions and positive renewal premium changes will be offset by consistent modest loss cost trends and
the inclusion of Dominion. This also assumes that weather patterns and what the Company defines as
large losses are consistent with the Company’s expectations. While the Company is taking actions to
improve profitability at Dominion, it will be a number of years before these actions, to the extent
successful, will be fully realized.
In Personal Insurance, the Company anticipates underlying underwriting margins during 2014 that
are broadly consistent with 2013. In Agency Automobile, the Company anticipates an improvement in
underlying underwriting margins during 2014 compared to 2013 due to the anticipated impact of
continued positive renewal premium changes, combined with the Company’s announced plan to reduce
certain claim adjustment and other insurance expenses, partially offset by loss cost trends. The
Company anticipates that the recently announced launch of Quantum Auto 2.0, as discussed below, will
increase new business premiums but will not have a meaningful impact on underlying underwriting
margins during 2014. In Agency Homeowners and Other, the Company anticipates a modest decline in
underlying underwriting margins during 2014 compared to 2013, reflecting a return to non-catastrophe
weather-related loss levels and loss cost trends consistent with the Company’s expectations, partially
offset by the anticipated impact of continued positive renewal premium changes. Also in Personal
Insurance, the Company’s direct to consumer initiative, the distribution channel that the Company
launched in 2009, while intended to enhance the Company’s long-term ability to compete successfully in
a consumer-driven marketplace, is expected to remain unprofitable for a number of years as this book
of business grows and matures.
The Agency Automobile line of business has been negatively impacted by various factors, including
the use of price comparison technology by agents and brokers as discussed above. The Company’s
actions in response to these factors include, among other things, an announced plan to reduce certain
claim adjustment and other insurance expenses, with the majority of the impact in the Agency
Automobile line of business. That plan is intended to result in savings of $140 million pre-tax per year
by 2015 when fully implemented. It will also result in a restructuring charge of approximately
$16 million, $12 million of which was incurred in 2013. Additionally, in the fourth quarter of 2013, the
Company launched a new private passenger automobile product, Quantum Auto 2.0. This product, in
addition to incorporating the cost savings described above, has a lower base commission rate than the
Company’s existing Quantum Auto 1.0 product. These changes in cost structure are intended to enable
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