The Travelers Companies, Inc.
) is scheduled to report earnings for the fourth quarter of 2013 on
Tuesday, January 21. The company has implemented pricing measures
to maintain profitability, which allowed it to beat market
estimates in 2013. Despite a high premium change rate of more than
8%, the insurer was able to maintain a retention rate of over 80%
through the first nine months. The relatively lower number of
natural disasters has also helped the company; its GAAP combined
ratio improved from 94.3% in 2012 to 90.6% in 2013 as catastrophe
related losses dropped from $808 million to $538 million.
Catastrophe-related losses account for about 10% of Travelers'
total claims and expenses. Hurricane Sandy struck the East Coast of
the U.S. in 2012, leading to catastrophe-related losses of $689
million for Travelers during the fourth quarter. In 2011, the
company faced losses totaling $1 billion from disasters like
Hurricane Irene and Tropical Storm Lee. No disasters of a similar
magnitude were reported during the 2013 fourth quarter, indicating
a drop in catastrophe-related losses for Travelers which should
lead to improved margins.
price estimate of $97 for Travelers
implies a premium of 10% to the current market price.
See Full Analysis for Travelers Here
Business As Usual
Business insurance is the most important division for Travelers,
accounting for more than half of the company's premiums and nearly
65% of its operating income. The division caters to companies
across the U.S., offering insurance contracts for workers'
compensation, commercial automobile and property insurance and
general liability insurance. Workers' compensation is the most
important insurance line within this division, accounting for 30%
for the premiums. Travelers is currently the second largest insurer
in workers' compensation line in the U.S., with a market share of
The company reported a 7% year-on-year increase in premiums from
the insurance line during the September quarter, with rate
increases of close to 10%. Premiums for the business insurance
division were unchanged from the prior year, but Travelers reported
a renewal premium change of 9%. Improvements in the job market,
with the unemployment rate reaching 6.7% in December, portend
higher demand for business insurance.
More than 80% of Travelers' investments are in fixed maturity
securities like government and corporate bonds. Low yields from
these investments were part of the reason that Travelers had to
resort to high premium rate increases to maintain profitability.
However, the Fed's decision to taper the Quantitative Easing
program has led to an increase in bond yields. The 10-year Treasury
bond yield has gone up from 1.5% in May 2013 to 3%. Although the
yield is still a long way off the pre-recession level of 5%, we
might see Travelers ease off its price hikes in the coming
A Similar Story For Personal Insurance
Travelers also offers automobile and homeowners' insurance to
individuals in the U.S. through its personal insurance division.
The company has maintained similar pricing trends in this division.
For the September quarter, the renewal premium change rate for
homeowners' insurance was around 11% while the retention rate was
over 83%. Lower catastrophe and weather related losses helped the
underlying combined ratio to improve 7 basis points to 71.6%.
For automobile insurance, Travelers reported a premium change
rate of 7% and a retention rate of 81%. The underlying combined
ratio improved slightly to 97.6%. The company has also launched a
low-cost auto insurance product named Quantum 2.0 across 15 states
in the U.S. This product could help the company build on its market
share of 2%. We will keep a close eye on the performance of the
division in the coming months.
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