The Travelers Companies‘ (NYSE:TRV) earnings for the third fiscal quarter of 2012 were helped by a massive drop of 85% in catastrophe related losses as the company’s profit for the period, at $864 million, was more than double that in 2011.^[1] Last year, the company was hit hard by natural disasters like Hurricane Irene and Tropical Storm Lee, which devastated the East Coast of the U.S. and resulted in losses of $394 million. To offset the losses, Travelers had to increase insurance rates by almost 8%. Despite the forced increase in prices, the property and casualty insurer maintained high retention rates – as high as 81% in its business insurance division.

The drop in catastrophe related losses reported by Travelers will also help us gauge the effect that improved weather conditions will have on other property and casualty insurers like Hartford Financial Services Group (NYSE:HIG) and AIG (NYSE:AIG). We currently have a price estimate of $70 for Travelers, which is in-line with the market price.

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Business insurance is Travelers’ biggest bread-winner, accounting for almost 60% of the company’s operating income in the last quarter. Net premiums written increased by 5% over the prior year to $2.9 billion. The workers’ compensation line of insurance was the biggest gainer with $841 million in revenues. Despite the effect of Hurricane Isaac, which struck the Gulf coast in late August, the loss and loss adjustment expense ratio improved from 75% to 62% on lower losses from weather-related phenomena.

Business and financial insurance account for 60% of out price estimate, and we expect margins to improve in the next few years and stabilize over the long term. Operating margin is directly influenced by weather-related phenomena and is highly unpredictable, which is why we maintain a conservative outlook.

Personal insurance, which accounts for 35% of the company’s net written premiums, was also influenced by the favorable weather patterns. Operating income for the division increased 23% year-on-year to $190 million. The company was successful in implementing pricing initiatives as the annual renewal premium change for auto and homeowners insurance was 8.7% and 12.4%, respectively. The loss and loss adjustment ratio improved drastically from 85.3% in the third quarter of 2011 to 59.8% in the last quarter.

With prudent pricing and favorable weather conditions, we expect Travelers’ personal insurance operating margin to improve over the next few years and stabilize in the long term. Like business insurance, personal insurance is also dependent on weather-related phenomena and therefore losses that might be incurred due to future catastrophes are unpredictable.

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