The Travelers Companies, Inc. (NYSE:TRV) is expected to announce earnings for the first quarter of 2013 on Wednesday, April 23.  Travelers is the sixth largest property and casualty insurer in the U.S. with a market share of 4.5% in terms of premiums earned.  It was one of the few companies in the industry to report an underwriting profit last year. We expect it to maintain its record with another profitable quarter this time around.
We are currently updating our valuation model for Travelers to include sub-divisions within its main insurance branches.
- Travelers Reports Mixed 2015 Results With Improved Underwriting But Drop In Net Income
- Improved Underwriting Lifts Travelers’ Q3 Earnings, Investment Income Still A Drag
- Strong Underwriting, Lower Catastrophe Losses Lift Travelers’ Earnings
- Travelers Earnings Preview: Underwriting Profitability, Business Growth In Focus
- A Look At The Personal Automobile Insurance Market In The U.S.
- Travelers’ Stock Drops As Q1 Profits Fall 21%
The business and financial insurance division accounts for 60% of Travelers’ revenues and 65% of operating income. The division caters to businesses across the U.S., offering insurance products like workers’ compensation, commercial multiperil insurance, commercial automobile insurance, fidelity and surety insurance, commercial property insurance and general liability insurance. Travelers is the market leader in the commercial automobile insurance business with market share of 7.8%. The company’s market share is 8.84% in the commercial mutiperil business and 7.31% in the workers’ compensation business.
In 2011, increased claims and losses due to Hurricane Irene and Tropical Storm Lee led to an underwriting loss for the business insurance division. The combined ratio (total expenses divided by premiums) for the year was 101%. Despite the devastation caused by Superstorm Sandy, Travelers managed an underwriting profit from the business insurance division in 2012. The combined expense ratio for the business insurance division was 94% in 2012. Going forward, we expect the company to compromise on market share in order to maintain profits. Underwriting profits will be crucial for Travelers particularly in the low interest rate environment.
The personal insurance division offers automobile and homeowners’ insurance to individuals across the U.S. The division accounts for 30% of the company’s revenues and 25% of operating income. Both of these lines of insurance contribute equally to revenues and operating income. Travelers has around 7.26 million personal policies in force, of which 2.36 million are automobile policies and 4.90 million are homeowners’ insurance policies. The company has a market share of 2.11% in the automobile market and 5.2% in the homeowners’ market. 
Around 15% of Travelers’ personal insurance net written premiums originate from New York, the state worst affected by Superstorm Sandy last year. Catastrophe-related losses incurred by the company’s personal insurance division were $1.49 billion in 2011 and $1.02 billion in 2012. As a result, the combined ratio in the last two years was above 100%, leading to an underwriting loss. However, historically, the combined ratio has been around 97% and we expect it to return to this value in the coming years.
Investment is an important source of income for insurance companies. Companies invest float collected from insurance activities and invest it to generate returns before the float is returned to policyholders in the form of claims. Investment income accounts for 10% of Travelers’ revenues and operating income. The company has more than $72.8 billion in invested assets, mostly in fixed maturity securities like government, state and municipal bonds. The average yield on these investments is around 4%.
Yield will be affected by lower interest rates prevalent in the U.S. Low interest rates will reduce the returns available on short-term investments and new fixed maturity investments, including those purchased to reinvest maturities. A rise in interest rates could have a detrimental effect on the market value of existing fixed maturity investments. Also, the prevailing adverse economic conditions might also lead to defaults in investments in bonds. We expect a short-term decline in yield with a long-term recovery coinciding with a global macro-economic recovery.Notes: