Sandy Soaks Travelers’ Q4 Earnings But Full Year Results Shined

January 23rd, 2013 by Trefis Team
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TRV: The Travelers Companies logo
TRV
The Travelers Companies

The Travelers Companies, Inc. (NYSE:TRV) announced earnings for the fourth quarter on Tuesday. The company, which focuses primarily on property and casualty insurance, was affected by the devastation caused by superstorm Sandy, with catastrophe related losses of $689 million during the quarter. The net income for the quarter declined by 51% over the prior year’s figure, but strong performance through the first nine months of the year helped the company to report a 73% increase in net income for the fiscal year. This increase reflected the company’s pricing initiatives, which led to an 8% increase in average premiums from renewed policies in the business insurance division.

Our price estimate of $70 for Travelers is in-line with the current market price.

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Business Insurance

Business and financial insurance is the most important division for Travelers, accounting for nearly 70% of the company’s premium income. The division reported a 16% year-on-year increase in claims and related expenses for the fourth quarter, with catastrophe losses of $34 million after tax and reinsurance. However, as expected, the annual operating margin improved from 11.6% in 2011 to 14.1%. The 2011 operating margin was affected by catastrophe related losses of around $ 1 billion from natural disasters like Hurricane Irene and Tropical Storm Lee. The total catastrophe losses in 2012 were around $794 after reinsurance, lower than those incurred due to the storms in 2011. The underwriting ratio improved by 4 basis points and also helped the increase in operating margin for the fiscal year.

Premium growth was just over 3% for the fourth quarter and for the fiscal year. With over 2,500 insurers including AIG (NYSE:AIG) and Hartford Financial Services Group (NYSE:HIG), operating in the U.S., the property and casualty market is highly competitive. Despite growth in the overall market, Travelers has been losing out in terms of market share. We estimate that Travelers’ share of the P&C market has dropped from 6.52% in 2008 to around 6.2% at the end of 2012.

Personal Insurance

Like business insurance, the personal insurance division was also affected by superstorm Sandy with catastrophe related losses of $370 million for the quarter, after tax and reinsurance. Also like the business insurance division, a strong performance through the first nine months of the year helped the division improve the operating margin from -4% to 3%. However, the division saw a drop in policies in force from 7.8 million at the end of 2011 to 7.2 million. This drop was mitigated by a double-digit insurance rate increase as the earned premiums for the 2012 fiscal year were in line with the earned premiums for 2011. We expect Travelers to consolidate its market share rather than aim for aggressive expansion in the next few years.

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