Travelers Earnings:Operating Income Drops Across Divisions
The Travelers Companies, Inc. (NYSE:TRV) reported earnings for June ending quarter 2014 that were below expectations. The company reported operating income of $673 million, down 18% year-over-year (y-o-y), even as revenues were up 2% to $6.785 billion compared to the previous year. [1] The combined ratio (expenses to premiums) for the quarter was 95.1% as compared to 94.3% a year earlier for the same period, as the net favorable prior year reserve development fell. Net investment income increased 8% to $695 billion. [2]
The underlying combined ratio, which excludes catastrophe losses and prior year reserve development, fell to 90.9% from 88.2% in the previous quarter as catastrophic losses mounted. We use the dividend discount model to estimate a price of $105 for Travelers, which is nearly 10% ahead of the current market price.
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Business and Financial Insurance
In business and financial insurance division, second quarter operating income was $663 million, dropping by over 10% compared to the previous year. This was largely due to catastrophe-related losses as well as 1% lower net favorable prior year reserve development. There was a solid increase in the premiums for the division this quarter compared to the same quarter in 2013, up from $3.7 billion to $4.1 billion.
Travelers continued to maintain a high retention rate (percentage of policies or accounts renewed that were available for renewal in the given period) of around 81%, while the renewal rate declined to around 6% from 7-8% in recent quarters. [2] For the worker’s compensation, commercial multiperil and commercial automobile segments within this division, the combined ratio was 99% while the underlying combined ratio was 92.1% for the quarter, an improvement of 4 percentage points year-over-year.
Personal Insurance
Operating income for the personal insurance division of 75 million was down 47% compared to the second quarter of 2013, driven largely by a lower net favorable prior year reserve development along with higher levels of catastrophe related losses in both auto and home segments.
Automobile Insurance
Travelers increased the availability of Quantum2.0, the new competitively priced auto product launched in 18 states in 2013, to 31 states across the U.S. at the end of this quarter. In these states that represent over 85% of the Travelers’ presence countrywide, the number of policies has more than doubled, when compared to pre-launch levels. Travelers was also able to maintain a retention rate of around 82% for the segment. [1]
Homeowner’s Insurance
In a market worth $80 billion in 2013 in terms of net premiums earned, Travelers is the sixth largest company owning less than 4.5% market share, while State Farm Group leads with over 20% market share. [3]
The company reported an underlying combined ratio of 81.5%, while the retention rate remained high at 84%, as well as the renewal premium change of about 8%.
We are in the process of updating our model to reflect the second quarter results
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