No Such Thing as a ‘Run on the Bank’ In Insurance Biz: Travelers CEO

With recent troubles in the banking sector having only minimal impact on his company’s specialty lines results, the chief executive of Travelers devoted a few minutes of an earning conference to describing how insurers stand apart from banks.

“There’s no such thing as a run in the bank in our business,” said Alan Schnitzer, Travelers Chair and CEO, taking note of the disruption in the banking sector and interrupting the general flow of a conference call devoted to reporting the insurer’s record premium levels for the first quarter and a 95 overall combined ratio.

Schnitzer noted that an “acceleration in liabilities in the form of withdrawals from demand deposit accounts” spurred problems for banks this quarter. “There’s no acceleration of our largest liabilities—loss reserves,” he added, explaining his comment about the impossibility of a run on insurers.

“The banking episode also highlighted the risk to the equity of an enterprise when the duration of assets and liabilities are mismatched,” he continued. “We manage the duration of our assets relative to our liabilities such that on an economic basis we’ve effectively defeased our insurance liabilities. In other words, increases or decreases in interest rates generally have offsetting impacts on the present value of both our investment portfolio and our outstanding insurance liabilities.”

“This essentially boxes the economic impact of changes in interest rates,” he said.

“This is a reason why we didn’t reach for yield by increasing duration in the low interest rate environment over the past decade-and-a half,” he continued, noting that he has addressed a number of questions from analysts on this in past years.

The insurance company leader said that insurers like Travelers also thoughtfully manage liquidity, in contrast to insolvent banks. “Quarter in and quarter out, we’ve consistently generated strong cash flows from operations. Our cash flows from premiums alone over the course of a year are consistently greater than our annual payments for claims and expenses. That was true throughout the 2008 financial crisis and more recently throughout the pandemic.”

Schnitzer also pointed to the presence of “a steady, reliable stream of cash flows from our very high quality fixed income portfolio”—in the form of periodic interest payments and proceeds from maturing investments.”

He then discussed Traveler’s prudent management of a its high quality investment portfolio, 93 percent of which is in diversified fixed income investments with an average credit rating of AA. Travelers has “relatively nominal risk” in the investment portfolio from commercial real estate—just 2 percent of fixed income holdings, according to a presentation slide displayed as the executive spoke to address any possible concerns about “another topic in the news.”

Commercial Real Estate in Crisis?

Challenges in the commercial real estate (CRE) sector are growing, according to experts at Morgan Stanley Wealth Management and Swiss Re Institute.

Earlier this month, an analysis from Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management, was widely reported in business publications highlighting a parallel she drew to the 2008 financial crisis. Noting the long-term trend of remote work threatening the office sector of the commercial real estate market, Shalett cited an additional problem—a “refinancing wall,” she said is facing the sector with “more than half of the $2.9 trillion in commercial mortgages” coming up for refinancing in the next few years at higher interest rates. “Even if current rates stay where they are, new lending rates are likely to be 3.5 to 4.5 percentage points higher than they are for many of CRE’s existing mortgages,” she wrote.

“Commercial property prices have already turned down, and Morgan Stanley analysts forecast prices could fall as much as 40 percent, rivaling the decline during the 2008 financial crisis,” her analysis continued, predicting that the challenges wouldn’t just hurt the real estate industry, “but also entire business communities related to it.”

Separately, in research published this week, economists at Swiss Re Institute also focused on pressures in the office sector and tighter lending standards—contributors to a weaker economic growth outlook and financial sector vulnerability. The report envisions the multiyear downturn pressuring small U.S. banks and insurers. “While the pressures are unlikely to pose systemic risks, we do expect the correction to last several years,” the economists wrote in the April 17 report, “U.S. commercial real estate: expecting prolonged challenges.”

The report, citing a Goldman Sachs analysis, notes that small U.S. banks originate 80 percent of CRE bank loans, but offers reasons why maturity risk is less acute than in the global financial crisis.

“Insurers face less immediate pressure than small banks given a lack of deposit risk, a larger weight toward higher-quality CRE mortgages and securities, a lower overall CRE weight in investment portfolios, and positioning towards less-affected segments such as residential,” the Swiss Re Institute report says.

Analysts, bankers and investment officers have been debating the potential for crash in commercial property prices steeper than the 2008 financial crisis for the last few weeks. (Related textbox, “Commercial Real Estate in Crisis?”)

At Travelers, beyond the fact that high-quality real estate represents a small percentage of total invested assets, the carrier’s non-fixed income real estate investments are wholly owned properties, Schnitzer said. “The wholly owned properties are carried at their depreciated historical cost. In other words, they were never written up when market values were high, and the appraised value of the portfolio is well above book value,” he said.

“In short, whether we’re talking about underwriting or investing, Travelers is built to manage uncertain times,” Schnitzer asserted.

Travelers insurance underwriting results were not totally untouched by the banking crisis.

“We’ve got some exposures on some of the financial institutions that were prominent in the news in the first quarter,” confirmed Jeffrey Klenk, president of the Bond & Specialty Insurance segment. “We booked some losses for those over and above what we have in our loss picks [and] that’s really the primary driver of the 3.9 points increase in the underlying combined ratio,” Klenk said, referring to an 86.1 combined ratio for the segment, excluding the impacts of favorable prior-year reserve development (6.7 points) and catastrophe losses (0.6 points)

The booked first-quarter 2023 combined ratio including those impacts, at 80.0, was only 2 points above the first-quarter 2022 result, in spite of the financial institution losses. Bond & Specialty, Travelers smallest segment, reported the best combined ratio.

Across all three insurance segments of its business—Business Insurance, Bond & Specialty, and Personal—Travelers posted an underwriting gain of $367 million, compared to a $659 million underwriting profit in first-quarter 2022. A big driver of the lower result was $535 million of pre-tax catastrophe losses, which Chief Financial Officer Dan Frey reported were $160 million above the average of Travelers’ first-quarter cat losses for the past five years.

For the quarter, net investment income rose 26 percent to $663 million, and the carrier posted $5 million of realized investment gains, vs. $19 million of realized losses in first-quarter 2022.

Overall, net income came in at $975 million after taxes, roughly 4 percent lower than last year’s first quarter. Read more about Travelers underwriting results in the related article, “Travelers Inks Record Commercial Premium for Q1 ’23.”