Improved Underwriting Lifts Travelers’ Q3 Earnings, Investment Income Still A Drag
The Travelers Company (NYSE:TRV) reported earnings for the third quarter on Tuesday, October 20, registering another period of improvement in underwriting performance. ((Q3 2015 Earnings Release, Travelers Investor Relations)) Travelers, which is among the top property and casualty (P&C) insurers in the U.S. in terms of market share, has benefited in recent quarters from its tight underwriting discipline. [1] Higher retention rates and premium rate increases also added to the growth experienced during the third quarter. However, persistent low interest rates continued to be a drag on the company’s investment income during the quarter. Both short term and long tern fixed income investments continue to feel the adverse impact of low interest rates. Additionally, non-fixed income investments were also hurt during the quarter due to lower returns on private equity and hedge fund investments.
We have a price estimate of $109 for Travelers’ stock, which is slightly below the current market price.
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Business Insurance Grows Domestically, Weak Internationally
The Business Insurance line – which includes worker’s compensation, commercial automobile, general liability and other insurance products – accounts for nearly two-thirds of the company’s total revenues. On the back of strong underwriting performance, underwriting gains from the division increased from just $160 million in Q3 2014 to about $272 million in Q3 2015. The combined ratio improved to 92.2% during the third quarter, compared to 95.2% a year ago. However, low investment income continued to dent operating income from the division. Within the domestic market, Travelers recorded a retention rate of over 80%. [2]
Higher retention rates and premium increases led to a 4% y-o-y increase in premium revenues from the domestic market. However, low business volume as well as FX headwinds led to a 19% y-o-y decline in premiums from Travelers’ international operations.
Personal Automobile Insurance Sees Solid Growth
Travelers’ Personal Insurance division, which offers homeowner’s multiperil and personal automobile insurance products, has seen decent growth on the back of improved underwriting performance as well as premium growth during the first nine months of 2015. At the end of the third quarter, the combined ratio for the division stood at 85.1% which is an improvement of 1% from a year earlier. The personal automobile segment continued to be the main driver of business for the Personal Insurance division. On the back of the company’s strong performance of Quantum 2.0, policies in force increased 6% y-o-y during the third quarter, resulting in a 10% y-o-y increase in net premiums written from the automobile insurance business. At the end of Q3 2015, Travelers had over 2.1 million automobile insurance policies in force, compared to less than 2 million in the beginning of 2014. In addition to business growth, the company has maintained a strong retention rate of 83% in the segment.
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