The Travelers Companies, Inc. (NYSE:TRV) benefited from strict underwriting discipline and a lack of natural catastrophes during the second quarter of 2013, as operating income grew from $495 million in Q2 2012 to $816 million this past quarter. Net income rose from $499 million to $925 million, respectively, and the combined ratio (expenses to premiums) improved by 7 basis over the prior year. The company has implemented strict pricing measures to maintain profitability in the low yield environment. Despite a 9% renewal premium rate increase during the quarter, Travelers maintained a retention rate of over 80%. The company has managed to maintain a high retention rate over the last six quarters despite a premium change rate of 7% to 8%.
The company also returned $491 million of excess capital to shareholders, with $191 million through dividends and $300 million through common share repurchases. We presently have a price estimate of $94 for Travelers, implying a premium of 10% to the current market price.
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Higher Rates To Help Margins Further
The recent spike in interest rates in the last few months following speculations regarding the Federal Reserve’s Quantitative Easing program led to an after-tax realized investment gain of $87 million through the last quarter. The 10 year Treasury yield has climbed from 1.76% at the end of 2012 to around 2.75%. Travelers will be able to reinvest gains from maturing bonds to realize higher yields in the coming years, and thus improve margins. This will also allow the company to ease up on raising premiums, allowing it to consolidate or even gain market share.
The business insurance division is Travelers’ most important division accounting for more than half of the premiums collected by the company and nearly 65% of its operating income. Premiums for the division grew by 6% over the prior year while the combined ratio improved from 103% to 96.2%.
Workers’ compensation continued to be the most important line of insurance in this division accounting for nearly 30% of the premiums earned by the business insurance division. Premiums for the line increased by 20% over the prior year. Travelers’ is currently the second largest insurer in workers’ compensation line in the U.S., behind MassMutual and has a market share of 7.3%.  With the improving job market, particularly in the manufacturing and construction industries, we expect the market to expand in the coming years. With its market position, Travelers is well placed to capitalize on this growth.  
Premiums for the commercial multiperil line of insurance, which accounts for 25% of the business premiums were in line with last year’s figure while commercial property premiums increased by 4%, year-on-year.
Challenges In Personal Insurance
The personal insurance business accounts for 32% of Travelers’ earned premiums and operating revenues. The division consists of two lines of insurance, personal automobile insurance and homeowners insurance, both of which account for roughly half of the division’s premiums. Retention rates in both lines were above 80% with a renewal premium change of 8% in personal automobile and 11% in homeowners’ insurance. The combined ratio for the division improved from 104.8% to 94.5%.
Travelers is the ninth biggest insurer in the automobile insurance domain, but its market share has dropped from 2.29% in 2010 to 2.11% in 2012.  The automobile insurance market is becoming very competitive particularly since most states in the U.S. have made it mandatory. Most vehicle insurance companies charge monthly premiums from insured parties with rates depending on the profile of the individual and the vehicle being insured. Insurers are now using technology to asses insurance rates for automobile insurance. Progressive, which is the fourth largest insurer in the private passenger automobile insurance category, ((ref:1)) has introduced its snapshot device which allows it to retain only the “safe” drivers thereby maintaining underwriting margins.
In this competitive environment, Travelers is looking to claim other insurance expenses to maintain profitability. These savings will be driven by staff reductions, and around 450 employees will receive their notices this week alone. The company’s restructuring policy is expected to result in net pre-tax saving of $140 million, but will lead to $16 million in restructuring charges of which $10 million will be incurred in the next quarter. We expect a slight decline in Travelers’ market share in the coming years as it maintains underwriting discipline in a highly competitive market.
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- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩] [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Overview and Outlook for the Workers Comp Market: Growth, Performance and the Economic Environment, Insurance Information Institute [↩]