Strong Underwriting, Lower Catastrophe Losses Lift Travelers’ Earnings
The Travelers Company (NYSE:TRV) reported solid earnings for the second quarter on Tuesday, July 21. [1] The company reported a 19% year-over-year (y-o-y) increase in net income of $812 million compared to a 30% y-o-y decline reported in the first quarter of 2015. Similarly, operating income increased by 20% y-o-y on the back of lower catastrophe-related losses, the settlement of tax matters resulting in an additional benefit of $32 million, and growth in the personal insurance division. However, lower investment income continued to plague overall earnings as the low interest rate environment persisted during the quarter. This continued to dent returns on fixed income instruments for the company. Travelers net investment income declined nearly 10% y-o-y to $632 million in the second quarter.
During the second quarter, Travelers benefited from a stronger underwriting performance across business segments, even as net premiums written remained largely unchanged compared to a year ago. The combined ratio, the ratio of claims to premiums earned, declined to 90.5% in the second quarter compared to 95.1% a year ago. [2] The improvement came due to lower catastrophe-related losses and higher net favorable prior year reserve development. This is a positive change, as during the first quarter the company saw a decline in net income due to heightened loss levels.
Following the strong earnings report, Travelers’ stock gained nearly 2% on Tuesday. We have a price estimate of $113 for Travelers’ stock, which is about 10% higher than the current market price.
See our full analysis of Travelers here
Business Insurance Up, International Growth Down
The Business Insurance line, which includes worker’s compensation, commercial automobile, general liability and other insurance products, is the most valuable division for Travelers. It accounts for nearly two-thirds of the company’s total revenues. The division reported strong underwriting gains during the second quarter, increasing from just $55 million in Q2 2014 to about $230 million in Q2 2015. The combined ratio improved to 93.2% during the second quarter, compared to 98.1% a year ago.
Within the Business Insurance operations in the U.S., premiums earned during the second quarter increased by about 2.3% y-o-y to over $3.1 billion helped by growth in the workers’ compensation and commercial multiperil lines of businesses. The company maintained a strong retention rate of about 84% during the second quarter. Outside of the U.S., the company saw a decline in premiums of about 15% during the second quarter. This was largely driven by FX fluctuations. ((The Travelers Companies’ CEO Jay Fishman on Q2 2015 Results, Earnings Call Transcript, Seeking Alpha)) Even though the company maintained a strong retention rate of 82% and renewal premium change of 1.5% in international operations, strict underwriting discipline, foreign exchange woes and increased competition impacted new business growth.
Robust Growth In Personal Insurance
During the second quarter, Travelers reported impressive growth in the Personal Insurance division, which offers homeowner’s multiperil and personal automobile insurance products. The division’s operating income rose to $174 million from just $75 million a year ago. This robust growth came on the back of strong underwriting gains, a $4 million tax benefit, lower catastrophe-related losses and higher net favorable prior year reserve development. The combined ratio improved tremendously from 99.8% in Q2 2014 to 91.1% in Q2 2015. In the personal automobile segment, the company’s Quantum Auto 2.0 product continued to deliver strong performance, adding 35,000 new customers during the quarter. The company reported 37% y-o-y growth in new business premiums in the auto insurance segment, and 33% y-o-y growth in new business premiums in the homeowners’ insurance segment.
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- Travelers Reports Second Quarter Net Income per Diluted Share of $2.53, Up 30% from Prior Year Quarter, Travelers Investor Relations [↩]
- SEC 10-Q Filing, July 21 2015 [↩]