The Travelers Companies, Inc. (NYSE:TRV) is expected to announce earnings for the third quarter of 2013 on Tuesday, October 22.  The insurance company has implemented strict pricing measures to maintain profitability in the low yield environment and its strategy has paid off so far. Despite a high premium change rate of around 7% to 8%, Travelers has maintained a retention rate of over 80% for the last six quarters. Stringent underwriting measures combined with a lack of natural disasters through the first half of the year allowed the company’s combined ratio (expenses to premiums) to improve from 96.3% in 2012 to 91.4%.
As a result, Travelers reported a 40% year-on-year surge in pre-tax and net income for the first half of 2013, despite slow premium growth of just 1%. We do not expect any surprises from the company this time around as management is likely to maintains its strict underwriting discipline.
We presently have a price estimate of $97 for Travelers, implying a premium of 10% to the current market price.
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 5% in the first half of the year, while the combined ratio improved from 96.3% to 92.9%. The underwriting expense ratio remained consistent around 32%, while the loss and loss adjustment expense ratio improved from 64.4% to 61.6%, as catastrophe losses dropped from $305 million in the first half of 2012 to $183 million in the same period in 2013. With no major natural disasters in the U.S. in the third quarter, we expect the combined ratio to remain around the 93% level.
Workers’ compensation is the most important business insurance line for Travelers, accounting for 30% of the division’s premiums. Travelers is currently the second largest insurer in workers’ compensation line in the U.S., with a market share of 7.3% and reported a 13% increase in earned premiums for the first half of 2013. 
Liberty Mutual (8.69% market share), The Hartford Financial Services Group (NYSE:HIG) (6.84% market share) and AIG (NYSE:AIG) (6.14% market share) are the other major insurance companies offering this line of insurance. Travelers will be the first insurer to announce results for the third quarter and its performance will help us assess the market and provide a preview of results for the other companies.
The unemployment rate in the U.S. has improved from the peak of 10.1% observed during the financial crisis in 2009 to a four-year low of 7.3% in August.  A growing job market will fuel demand in the business insurance market. Manufacturing employment has increased by 4.3% since 2010, while jobs in the construction industry have increased by 5.4% since the start of 2011.  Both of these employment lines are big markets for workers’ compensation and growth in the job market should lead to increased demand for insurance in the coming years.Notes:
- Investors, Q3 2013 The Travelers Companies, Inc. Earnings Conference Call (Live) [↩]
- 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 [↩]