The Factors Impacting Travelers’ Business And Financial Insurance Division
In the recently announced financial results for the quarter ending June 2014, The Travelers Companies (NYSE:TRV) reported a drop of more than 10% year-over-year in operating income for its business and financial insurance division. This fall was primarily due to catastrophe-related losses as well as lower net favorable prior-year reserve development. However, the company managed a high retention rate (the percentage of policies or accounts renewed that were available for renewal in the given period) of around 81%, and the renewal rate change was around 6%. [1] We expect the company’s strong fundamentals as well as its leading market position to support growth in the long term.
Travelers is the fifth largest property and casualty (P&C) insurer in the U.S., with a market share of 4.22% in terms of net premiums earned. [2] In our model we divide the company into two units – business and financial insurance, and personal insurance. In this article, we discuss key trends that drive Travelers’ business and financial insurance division.
We have a price estimate of $107 for Travelers’ stock, which is nearly 15% higher than the current market price.
See our full analysis of Travelers here
Emphasis On Underwriting
The combined ratio, the ratio of expenses (claims) to premiums, is a measure of the underwriting performance of an insurer. A ratio below 100 indicates profitability, while a ratio above 100 means the company is generating underwriting losses. During the second quarter of 2014, Travelers’ combined ratio for the worker’s compensation, commercial multiperil and commercial automobile segments was 99% due to higher catastrophe-related losses and prior year reserve developments. The underlying combined ratio (which excludes catastrophe losses and prior year reserve development) was 92.1%, an improvement of 4 percentage points year-over-year.
Travelers has a reputation for following tight underwriting practices, laying special emphasis on profitability rather than market share. We expect the company’s strategy focusing on profitability to allow it to maintain strong future results.
Macroeconomic Indicators
The company’s business and financial division includes worker’s compensation, commercial automobile and general liability products, all of which are affected by macroeconomic conditions. The recovery in the U.S. economy remains inconsistent, with GDP growing by over 4% in the second quarter of 2014 after contracting by 2% in the first quarter due to harsh winter conditions. [3] An improving economic environment bodes well for products like commercial multiperil and general liability insurance.
The unemployment rate in the U.S. has been declining in recent quarters. During the first six months of the year, the economy managed to add over 200,000 jobs each month, which resulted in the unemployment rate dropping to 6.2% in July 2014 largely on the back of growth in the manufacturing sector. [4] This is especially encouraging for Travelers as worker’s compensation products are most commonly used in manufacturing workplaces. We expect the workers’ compensation insurance market to benefit from these recovering conditions, and the company should be able to leverage its strong brand and leadership position in the segment. Currently with a share of over 8% in terms of net premiums earned, Travelers is the largest player in the worker’s compensation insurance product line in the U.S. market. [2]
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