Travelers Reports Record Operating Income, Stock Worth $97
The Travelers Companies, Inc. (NYSE:TRV) reported a record quarterly operating income of $883 million for the third quarter of 2013, helped by its premium pricing strategy and a lack of catastrophes across the U.S. during the three months ending September. [1] Net income was flat for the quarter, but year-to-date income is up 24% from last year. The property and casualty insurer’s GAAP combined ratio (expenses to premiums) improved from 90.3% in the third quarter of 2012 to 88.9% this year as the loss and loss adjustment ratio decreased from 58.4% to 57.3%. The year-to-date improvement is even more significant; the GAAP combined ratio for the first nine months of the year improved from 94.3% to 90.6% as catastrophe related losses dropped from $808 million to $538 million. Net premiums and revenues for the quarter were unchanged from the prior year.
We presently have a price estimate of $97 for Travelers, implying a premium of 10% to the current market price.
See Full Analysis for Travelers Here
Business As Usual
Business insurance is the most important division for Travelers, accounting for more than half of the company’s premiums and nearly 65% of its operating income. The division caters to companies across the U.S., offering insurance contracts for workers’ compensation, commercial automobile and property insurance and general liability insurance. Premiums for the division were in line with the prior year’s figure, as Travelers continued with a renewal premium change of 9% but still maintained a high retention rate of 80%. Rate increases were close to 10% in workers’ compensation and commercial automobile lines of insurance.
The insurance market has also been affected by low yields from bonds, which are the main source of investment for insurance companies. More than 80% of Travelers investments are in fixed maturity securities like government and corporate bonds, the yields on which have dropped significantly over the last few years. The 10 year Treasury bond yield, which can be used as a benchmark for bond yields, was around 5% before the financial crisis but fell to around 1.5% in 2012, primarily due to Fed policies. [2] Although the yield has improved to 2.60%, it is still a long way off pre-recession levels.
Low yields from bonds as well as high catastrophe-related losses due to natural disasters like Hurricanes Irene and Sandy have forced insurance companies to resort to price hikes to maintain profitability. Travelers’ peer, The Hartford Financial Services Group (NYSE:HIG), reported premium rate hikes of 9%-10% in the middle market workers’ compensation and commercial property lines of insurance for the second quarter. Combined with the improving job market, which has seen the unemployment rate drop from the peak of 10.1% observed in 2009 7.3% in August, [3] we expect the price hikes to lead to overall growth in the market in the coming years.
Workers’ compensation is the most important business insurance line for Travelers, accounting for 30% for the division’s premiums. Travelers is currently the second largest insurer in workers’ compensation line in the U.S., behind Liberty Mutual Insurance ( 8.69% market share). The company reported a 7% year-on-year increase in premiums from the insurance line. The strong underwriting performance shown by Travelers in uncertain economic conditions also sets the tone for Hartford (6.84% market share) and AIG (NYSE:AIG) (6.14% market share) which are expected to report earnings later this month.
Personal Insurance On Track As Well
Travelers also offers automobile and homeowners’ insurance to individuals in the U.S. through its personal insurance division. Operating income from this business was up 27% over the prior year as the combined ratio improved from 89.7% in 2012 to 84.7%. Renewal premium change rate for homeowners’ insurance was around 11% while the retention rate was over 83%. Lower catastrophe and weather related losses helped the underlying combined ratio to improve 7 basis points over the last year to 71.6%. Travelers is the sixth biggest insurance company in this line of insurance, with a market share of 5%.
For automobile insurance, the company reported a premium change rate of 7% and a retention rate of 81%. The underlying combined ratio improved 0.5 basis points to 97.6%. Travelers also announced that it will launch Quantum 2.0 across 15 states in the fourth quarter. The low-cost segment auto insurance product will allow the company to improve its position in the highly competitive automobile insurance market. Travelers is currently the ninth-biggest insurer in the automobile insurance domain, with a market share of 2%.
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Notes:- The Travelers Companies Management Discusses Q3 2013 Results – Earnings Call Transcript [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]