Strong Underwriting Performance, Investment Results Help Travelers Beat Market Expectations
The Travelers Companies (NYSE:TRV) beat market expectations as it reported a 19% increase in operating income and a 6% increase in revenues for the first quarter of 2014. [1] The GAAP combined ratio (expenses to premiums) improved 2.8 points over the prior year to 85.7%, helped by net favorable prior year reserve development. Investment income was up 7%, driven by strong returns from the company’s private equity and real estate partnership investments. However, these gains were partially offset by a 49% increase in after-tax catastrophe losses, net of reinsurance, resulting from adverse winter conditions in the U.S. The underlying combined ratio, which excludes catastrophe losses and prior year reserve development, improved from 90.8% to 88.2% as the company’s earned rate increases exceeded loss trends.
Travelers also returned $882 million in capital to shareholders and announced a 10% increase in quarterly dividends per share. We use a dividend discount methodology (DDM) to estimate the value of the company. Our price estimate of $98 for Travelers implies a premium of 10% to the current market price.
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Business Insurance
Business insurance is the most important division for Travelers, accounting for more than 60% of the company’s operating income. For the March quarter, the division reported an 11% increase in operating income over the prior year, helped by a 1.7 percentage point improvement in the combined ratio. The underlying ratio improved by 4% to 88.1%. This was due to a reduction in the estimated liability for assessments related to workers’ compensation premiums. The workers’ compensation line of insurance accounts for nearly a third of the premiums earned by the business insurance division and is the biggest contributor to the division.
Travelers is currently the second largest insurer in workers’ compensation in the U.S., with a market share of 8%. [2] However, its underwriting performance has been stronger than market leader Liberty Mutual. The latter reported a direct expense to premiums ratio of 86.53% for 2013 while Travelers reported a ratio of 61.7%. For the first quarter of 2014, Travelers reported a 2% increase in net written premiums for the insurance line. We expect the company to continue to focus on profitability in the coming years, even at the cost of market share.
Personal Insurance
Operating income for the personal insurance division increased 36% over the prior year with a 5.8 percentage point improvement in the combined ratio. The underlying combined ratio improved 1.8 percentage points with rate increases exceeding loss trends. However, the net written premiums decreased 4%, with a 5% decrease in the agency automobile line and a 4% decrease in the agency homeowners line. Travelers is the ninth largest personal automobile insurance provider in the U.S., with a market share of 1.94%. The company launched a new auto product, Quantum 2.0, last year. This product was rolled out in 28 states by the end of the March quarter and has a low price structure and lower commissions. Travelers maintained a renewal premium change of 6% while keeping a high retention rate of over 80%.
For homeowners’ insurance, the company reported a retention rate of nearly 85% while keeping a renewal premium change rate of 8.5%. The combined ratio improved 1.5 percentage points to 80%. Travelers is the sixth largest insurer in the homeowners’ domain in the U.S., with a market share of 4.39%.
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