Business Growth, Improved Underwriting Performance Lift Travelers’ Earnings

-4.21%
Downside
230
Market
220
Trefis
TRV: The Travelers Companies logo
TRV
The Travelers Companies

The Travelers Companies (NYSE:TRV), the largest property and casualty insurer in the U.S.,  beat market expectations as it reported fourth quarter and full year 2014 earnings on Thursday, January 22. [1] [2] As a result, the company’s stock was up by over 3% at the end of the day’s trading. The company reported a 4% year-over-year rise in revenues for the year, as premiums written increased by 5% year-over-year during the same period. The increase came on the back of growth in domestic business insurance and also from the inclusion of Dominion’s business that Travelers acquired in late 2013. [3] [4] Net income per diluted share jumped by 10% for the same period compared to a year ago. The combined ratio, which is the ratio of claims and expenses to premiums earned, improved by 80 basis points to 89% for the full year, benefiting from a better underlying combined ratio and a higher net favorable prior year reserve development. However, slightly higher catastrophe losses due to wind, hail and winter storms partially offset the underwriting gains.  The underlying combined ratio (excludes prior year reserve development and catastrophe losses) also improved by 100 basis points to 89%. The company maintained retention levels of over 82% and renewal rates of close to 8% during the year.

As for the final quarter, operating income rose by 4% year-over-year, primarily due to improved underwriting performance, despite a decline in investment returns and a rise in other expenses (includes interest expense). Lower catastrophe losses and higher net favorable prior year reserve development led to a 200 basis point improvement in the combined ratio to 85% during the quarter.

We have a price estimate of $109 for Travelers’ stock, which is almost in line with the current market price.

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See Full Analysis for Travelers Here

Business Insurance

Business insurance, which includes workers’ compensation, commercial automobile, fidelity and other insurance products, is the most valuable division for the company. It accounts for nearly two-thirds of the company’s total revenues. For the full year 2014, net premiums written increased by 8% year-over-year, with the largest gains coming from international markets. Outside the U.S. the company has a significant presence in Canada, Ireland, the U.K. and Brazil, and accounts for about 15% of the total premiums written in the division. Operating income declined by about 2% during the year, primarily due to increase in income tax and other expenses. Lower net favorable prior year reserves led to an increase in combined ratio to 93.1% for the division during the year.

Going forward, we believe that the company stands to benefit from the improving macroeconomic environment in the U.S. Factors such as the falling unemployment rate will be favorable for the company’s workers’ compensation product line. [5] Additionally, GDP growth should lead to an increase in business in the commercial insurance segment. [6]

Personal Insurance

The company offers homeowner’s multiperil and personal automobile insurance products within this division. The division reported a 1% year-over-year decline in net premiums written in 2014. Gains made from investment income and a favorable tax-settlement of $5 million were offset by a decline in other income, thus leading to an overall decline of 2% year-over-year in operating income at $824 million in 2014. The combined ratio for the division of 88.7% was 0.2 points better than last year.

Investment Income

During 2014, the company reported an increase in net investment income to about $2.8 billion compared to $2.7 billion in 2013. This was due to strong performance in private equity and strong returns from real estate partnerships. However, returns from its fixed income portfolio declined.

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Notes:
  1. SEC 8-K Filing, January 22 2015 []
  2. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM []
  3. Travelers Reports Record Fourth Quarter and Full Year Net and Operating Income per Diluted Share, Travelers Press Release []
  4. Travelers to Acquire The Dominion of Canada General Insurance Company, Travelers Press Release []
  5. Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics []
  6. Gross Domestic Product: Third Quarter 2014 (Third Estimate), Bureau of Economic Analysis []