The Travelers Companies (NYSE:TRV) has increased insurance rates for business clients by 7.7% so far in the third quarter of 2012.  This is the largest quarterly increase in prices by the company which has a long standing history of offering competitive prices to institutional clients. In the third quarter of 2011, insurance rates rose by 3%, but the massive catastrophe costs incurred last year have forced the company to increase rates this year.
We presently have a price estimate of $63 for Travelers, which is in-line with the market price.
Last year, Travelers reported catastrophe related losses of $2.56 billion, mostly due to tornado and hail events in the U.S. To compensate, Travelers had to increase prices by 7.5% in the first quarter of 2012 and 7.2% in the second quarter. Travelers has been losing market share in the highly competitive property and casualty market in the recent year, and we expect the trend to continue at least in the short-term, with Travelers market share approaching 5.5% by 2019. There is a potential upside of 10% to our price estimate should Travelers succeed in increasing market share to around 6.5% by the end of our forecast period.
The company will also focus on retaining its business customers. Business retention rates in the second quarter remained consistent with last year indicating some positive signs for the company. Business and financial insurance is the most important driver for Traveler’s stock, accounting for 60% of our price estimate.
Travelers has also announced that it will not take on more risk in its fixed-income investment portfolio to compensate for a flattened yield curve in a low interest rate environment. We expect a gradual improvement in the operating margin on its investment business, which sunk to a low of 11% last year. Income from investment of insurance premiums accounts for 38% our price estimate for the company’s stock.
You can gauge the effect of a change in forecast by modifying the interactive charts above.Notes: