The Travelers Companies, Inc. (NYSE:TRV) is scheduled to report earnings for the fourth quarter of 2013 on Tuesday, January 21.  The company has implemented pricing measures to maintain profitability, which allowed it to beat market estimates in 2013. Despite a high premium change rate of more than 8%, the insurer was able to maintain a retention rate of over 80% through the first nine months. The relatively lower number of natural disasters has also helped the company; its GAAP combined ratio improved from 94.3% in 2012 to 90.6% in 2013 as catastrophe related losses dropped from $808 million to $538 million.
Catastrophe-related losses account for about 10% of Travelers’ total claims and expenses. Hurricane Sandy struck the East Coast of the U.S. in 2012, leading to catastrophe-related losses of $689 million for Travelers during the fourth quarter. In 2011, the company faced losses totaling $1 billion from disasters like Hurricane Irene and Tropical Storm Lee. No disasters of a similar magnitude were reported during the 2013 fourth quarter, indicating a drop in catastrophe-related losses for Travelers which should lead to improved margins.
Our price estimate of $97 for Travelers implies a premium of 10% to the current market price.
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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. Workers’ compensation is the most important insurance line within this division, accounting for 30% for the premiums. Travelers is currently the second largest insurer in workers’ compensation line in the U.S., with a market share of 8%. 
The company reported a 7% year-on-year increase in premiums from the insurance line during the September quarter, with rate increases of close to 10%. Premiums for the business insurance division were unchanged from the prior year, but Travelers reported a renewal premium change of 9%. Improvements in the job market, with the unemployment rate reaching 6.7% in December, portend higher demand for business insurance. 
More than 80% of Travelers’ investments are in fixed maturity securities like government and corporate bonds. Low yields from these investments were part of the reason that Travelers had to resort to high premium rate increases to maintain profitability. However, the Fed’s decision to taper the Quantitative Easing program has led to an increase in bond yields. The 10-year Treasury bond yield has gone up from 1.5% in May 2013 to 3%.  Although the yield is still a long way off the pre-recession level of 5%, we might see Travelers ease off its price hikes in the coming quarters.
A Similar Story For Personal Insurance
Travelers also offers automobile and homeowners’ insurance to individuals in the U.S. through its personal insurance division. The company has maintained similar pricing trends in this division. For the September quarter, the 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 to 71.6%.
For automobile insurance, Travelers reported a premium change rate of 7% and a retention rate of 81%. The underlying combined ratio improved slightly to 97.6%. The company has also launched a low-cost auto insurance product named Quantum 2.0 across 15 states in the U.S. This product could help the company build on its market share of 2%. We will keep a close eye on the performance of the division in the coming months.Notes:
- Q4 2013 The Travelers Companies, Inc. Earnings Conference Call, Investor Relations [↩]
- 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 [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]