Travelers Earnings Preview: Underwriting Profitability In Focus

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TRV: The Travelers Companies logo
TRV
The Travelers Companies

The Travelers Companies, Inc. (NYSE:TRV) is scheduled to report earnings for the first quarter of 2014 on Tuesday, April 22. [1] The property and casualty (P&C) insurance company benefited from a lack of catastrophes in 2013, with fourth quarter net income soaring 225% over the prior year. [2] Travelers reported a combined ratio (total expenses to premiums) of 87.7% for the December quarter, an improvement of 18 percentage points over the prior year. This allowed the company to observe a 44% increase in its underlying underwriting gain (operating income without investment income).This was both a result of the company’s pricing strategy and a decline in catastrophe related losses, which fell from $ 1 billion in the fourth quarter of 2012 to $53 million. Travelers has maintained a renewal premium change rate (change in average premium on policies that were renewed) of 8% for the last few while keeping the retention rate over 80%. With this pricing strategy and another quarter with no major disasters, we expect strong results from the company for the three months ending March.

Our price estimate of $98 for Travelers implies a premium of 15% to the current market price. In our valuation model, we have divided the company into three business divisions: Business and financial insurance, personal insurance and investment income. The business and financial insurance division accounts for 60% of Travelers revenues and 65% of the operating income. The personal insurance division accounts for 30% of the company’s revenues and 25% of its operating income. Investment income accounts for 10% of the revenues and operating income but is important for the company to maintain margins.

See Full Analysis for Travelers Here

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Business Insurance

Travelers’ main business insurance product line is workers’ compensation, accounting for almost 30% of the net written premiums in the business insurance division. The line covers employers for workplace injuries to employees. The benefits offered include medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The products included in this line of insurance include both fixed premium policies, loss sensitive policies and also loss prevention and risk management policies where the company charges insurance fees rather than premiums.

The workers’ compensation line of product accounts for 10% of the total P&C premiums generated in the U.S. Travelers is currently the second largest insurer in workers’ compensation line in the country, with a market share of 8%. [3] The company reported a 4% increase in premium volume during the fourth quarter with a 7% increase for the full year.

Improvements in the job market have seen the unemployment rate drop from 7.9% at the beginning of 2013 to 6.7%. [4] As the job market improves further, we expect higher demand for workers’ compensation insurance, with Travelers in pole position to capitalize. However, the company has maintained strict underwriting discipline, which allowed it to report a combined ratio of 92.2% for 2013. Travelers may compromise on market share in order to maintain profitability.

Personal Insurance

In the personal insurance domain, Travelers offers automobile insurance and homeowners’ insurance to individuals across the U.S. The company has a market share of 2% in the highly competitive auto market and 5% in the homeowners’ market. Travelers launched Quantum 2.0, a low cost segment auto insurance product, in 18 states across the U.S. during the fourth quarter. Although the product was deemed to be successfully launched, the net premium volume decreased 4% as the total number of policies in force fell from 2.4 million at the end of 2012 to 2.1 million at the end of 2013. The company continued to focus on profitability, as its underlying combined ratio improved 1.6 percentage points to 97.6% for the full year. For homeowners’ insurance, the full year combined ratio was 77%. We expect another profitable quarter for Travelers but will keep an eye on new business volume to gauge the performance of Quantum 2.0.

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Notes:
  1. Q1 2014 The Travelers Companies, Inc. Earnings Conference Call (Live), Investor Relations []
  2. The Travelers Companies Management Discusses Q4 2013 Results – Earnings Call Transcript []
  3. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  4. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey []