Travelers Maintains Underwriting Profitability, Helped By Lack Of Catastrophes
The Travelers Companies, Inc. ( TRV ) reported strong results for the fourth quarter of 2013, driven by improved underlying margins, prior year reserve development and lower catastrophe related losses. Net income for the quarter soared 225% as the combined ratio (total expenses to premiums) improved 18 percentage points to 87.7%. A combined ratio of below 100% indicates that the insurer is able to generate an underwriting profit. Traveler's pricing strategy and underwriting discipline has allowed it to maintain profitability despite low returns from investments; the underlying underwriting gain for the full year increased 44% over the last year. The lack of natural disasters also helped the company, as catastrophe related losses dropped from $1 billion in the fourth quarter of 2012 to $53 million. Catastrophe related losses were due to Hurricane Sandy in 2012. Net written premiums for the fourth quarter were up 5%, driven by the acquisition of Canadian insurer Dominion. The transaction was completed in November.
Travelers returned excess capital to shareholders with $1 billion in share repurchases and $182 in dividends during the fourth quarter. To arrive at a price estimate for the company, we have used a modification of the dividend discount model ( DDM ). In our model, we are estimating the total income that can be returned to shareholders and discounting this value back to the present.
Our price estimate of $97 for Travelers implies a premium of 15% to the current market price. Despite the positive results, the stock fell 1.7% after the announcement, as investors were likely deterred by the exposure of the company's results to future natural disasters (as much of the growth in earnings came from a relative lack of catastrophes).
Improvements In Business Insurance Margins
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. For the fourth quarter, the company reported an underwriting gain of $333 million from the division, as opposed to a loss of $119 million in 2012. In line with recent quarters, Travelers maintained a renewal premium change rate (change in average premium on policies that were renewed) of 8% while keeping the retention rate over 80%. These rate increases exceeded loss trends as the underlying combined ratio improved by 1 percentage point to 91.5%. For the full year, the improvement was of 2.5 percentage points with the ratio reaching 92.2%.
The rate changes also affected the top line as the company reported a record-high net written premium volume of $12.2 billion for the full year, up 3% over the prior year. The commercial property line of insurance reported the biggest gain of 10% for the fourth quarter and 6% for the full year. The workers' compensation line, which accounts for 30% of the division's premium volume, reported a 4% increase for the quarter and a 7% increase for the full year. Travelers is currently the second largest insurer in workers' compensation line in the U.S., with a market share of 8%. We expect further growth in this line as the improving job market leads to higher demand for business insurance.
Travelers launched Quantum 2.0, a low cost segmented auto insurance product, in 18 states across the U.S. during the fourth quarter. This product successfully drove an increase in new business volume while the company maintained renewal premium change rate of 7% with a retention rate of 81%. Despite this, the net premium volume decreased 4% as the total number of policies in force fell from 2.4 million at the end of 2012 to 2.1 million at the end of 2013. Profitability remained strong as the underlying combined ratio improved 1.6 percentage points to 97.6% for the full year. Travelers has a market share of 2% in the highly competitive auto market and will have to keep adapting to maintain it.
Strong At Home
In the homeowners' line of insurance, Travelers maintained a high premium change rate of 10% with a retention rate of 84%. The full year combined ratio was 77%, indicating a very strong underwriting performance. The total number of policies in force dropped from 4.7 million to 4.3 million, as net written premiums fell 4% for the quarter. Travelers has a market share of 5% in the market, but its focus on profitability could well see it lose some share in the coming years.
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