Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
As earnings season continues, some of the nation's biggest insurers are up to bat in the coming days. First up is Travelers Companies (NYSE: TRV ) on Oct. 22. The company has been trying to refocus its initiatives to better suit the company's long-term viability, so investors should be on the lookout for three distinct ways Travelers can better position itself.
1. Reducing expenses
Travelers announced plans during its second-quarter earnings call to reduce expenses in its personal auto division, including the termination of 450 positions. Though the company reported a 6.2 point drop in its combined ratio for the quarter -- falling from 100.5 in 2012 to 94.3 -- the gains were achieved because of a huge reduction in catastrophic losses and better underwriting.
The announced plan aimed at a 10% reduction in expenses, which would total $140 million and is expected to be fully realized by 2015, though the company should see some immediate savings. Investors should keep an eye out for any updates the company might provide on the plan's progress and if there are any plans to extend the initiative beyond just the personal auto segment.
2. Increasing premiums
During the second quarter's conference call, the executives at Travelers admitted that a former strategy had turned into a liability. The company had been completing some profitability initiatives, including higher pricing and raising deductibles among other measures, and found that the plans did not work across all product segments.
Particularly focused on increasing their competitive stance in the personal auto market, Travelers found that pricing has been a much bigger sticking point for consumers than they previously thought. With the increasing number of independent agents using comparative rating technology (think Priceline.com for insurance), Travelers was getting fewer opportunities to provide quotes than historical trends. Though the higher pricing was helping in terms of profitability, the company's new business volume was being hurt.
The personal auto insurance market is particularly competitive. Because of the mandate on insurance (i.e., if you have a car you need insurance) the huge market provides a great opportunity for large premiums volume, so most insurers are trying to gain as much market share as possible.
|Insurance Company||Personal Auto Market Share (2012)|
|Allstate (NYSE: ALL )||10%|
|Berkshire Hathaway (NYSE: BRK-B )||9.6%|
|Progressive (NYSE: PGR )||8.27%|
Both Allstate and Progressive have been pioneering the use-based insurance technology to allow their customers (and even prospective ones) to potentially reduce their rates by demonstrating their good driving habits. Neither Travelers nor Berkshire Hathaway's Geico operations have provided that option to their policyholders yet. But Geico has had a meteoric rise in market share over the past 10 years, increasing its policyholders from 5 million in 2002 to 12 million last year.
Travelers really needs to up its competitive advantages, since it falls so far behind the market's top dogs. By pricing its new auto insurance product better, the company is hoping to be in the top two rates when agents quote consumers their options in the comparative rating system. The company still believes the quality of its product is strong enough that it doesn't have to be the lowest rate in the system, but being in the top two should greatly increase its chances of gaining new business.
3. Boosting investment income
During the second quarter, Travelers noted that investment income was down year over year because of the low interest rate environment. Though this has been a pressure point for most insurers in the market, the company needs to develop more strategies to boost this integral income stream. During its earnings call with analysts, Jay Benet, the company's CFO, noted that if the current interest rates remain the norm going forward, that the company would experience a $25 million decrease in investment income per quarter. Though in the scheme of things this is a relatively small number, any boost to investment income can provide both the company and its shareholders with increased value -- something the company should be focused on.
Another killer quarter?
For any investor interested in Travelers Companies, this quarter will be a test of the company's mettle. Last quarter, despite dropping 5% in new business, the bottom line surged 85% versus the previous year. Now that the insurer is set on fixing the problems it created with its focus on profitability, there may be another big drive in results for investors to celebrate. Be sure to check back next week for coverage of the company's results!
Insurance isn't all...
Of course, Berkshire Hathaway is one of the top property insurers, with its Geico division going gangbusters over the past decade. Under the guidance of Warren Buffett, the company has consistently given its shareholders exciting returns year after year.
Warren Buffett has made billions through his investing, and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.