Travelers Shrugs Off Extreme Weather With Solid Results And Better Margins

A sharp decline in weather related catastrophe losses helped The Travelers Companies, Inc. (NYSE:TRV) turn around the net loss of $364 million reported in the second quarter of last year, into a profit of $499 million, this year. ^[1] The company reported earnings for the second fiscal of 2012 on Thursday, 19^th July. Despite a decline in revenues reported to be $6.35 billion, improved underwriting margins as well a healthy net investment income in the low interest environment helped Travelers’ performance during the period. We discuss below a few key trends that influence our valuation of the company’s stock.

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Fine Margins

Despite losses from flooding in Florida, wildfires in Colorado and the hailstorms in Dallas, (See Dallas Storms Are A Bad Sign For Insurance Companies) catastrophe related losses totaled $357 million in the second quarter, a massive improvement over the $1.08 billion figure reported in the prior year. A prudent approach helped Travelers improve underwriting margins as the consolidated combined ratio declined from 125% to 100.5%.

Although still reporting a loss of $47 million, the company observed a massive improvement from the underwriting loss of $924 million, observed in the second quarter of 2011. Operating income for Business Insurance increased 9%, year-on-year, to $488 million. As Travelers continues to leverage advanced analytics to realize increased profitability, we expect operating margins to improve over our forecast period.

In Insurance, We Trust

Natural calamities like Hurricane Irene, which shocked the U.S. last year, convinced quite a few people to turn to insurance to protect their property with P&C insurance. Net written premiums for the second quarter were a healthy $5.86 billion, in-line with $5.81 billion in 2011. Renewal rate for business insurance exceeded 7% as the company was able to increase renewal prices for auto and homeowners insurance by 6% and 11% respectively. Business and financial insurance accounts for 60% of Travelers’ value, according to our analysis and we expect the total premiums in the U.S. to increase steadily over the next few years, as mother nature has her say over weather conditions, causing prudent customers to opt for insurance policies.

We presently have a price estimate of $63 for Travelers, which is concurrent with the market price. You can gauge the effect of a change in forecast by modifying the interactive charts shown above.

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1. The Travelers Companies Management Discusses Q2 2012 Results – Earnings Call Transcript , Seeking Alpha, 19^th July, 2012 [↩]