The Travelers Companies, Inc. (NYSE:TRV) is expected to announce earnings Thursday, July 19.  The insurance company will be the first major property and casualty insurer to report this quarter, and its performance will provide a useful insight on the market outlook for the industry which is still recovering from losses suffered from natural calamities such as Hurricane Irene in the U.S. last year. We discuss below a few parameters which are likely to impact the company’s stock.
Can Business and Financial Insurance Recover?
Business and financial insurance is a major part of Travelers’ business, and the division accounts for more than half (60%) of our stock price estimate. Travelers provides property, auto, general liability, financial and professional insurance to businesses. With an effective pricing and marketing strategy, the company was able to maintain a strong balance sheet through 2011, even as industry peers such as AIG (NYSE: AIG), MetLife (NYSE: MET), Prudential Financial (NYSE:PRU) and Hartford Financial (NYSE: HIG) reported significant catastrophe-related losses. The performance continued in the first quarter, as the company’s business strategy allowed it to attract and retain customers, leading to an 8% year-on-year increase in renewal rates with a 3% increase in net written premiums.
Hailstorms in Dallas might have had a huge impact on the business and financial insurance division. (See Dallas Storms Are A Bad Sign For Insurance Companies) The Southwestern Insurance Information Service, a trade group representing property insurers in Texas and Oklahoma, estimates that insurance losses due to the storm to be as high as $2 billion, and has labelled it a catastrophe. This is quite a significant amount considering that insurance losses due to hail, winds and floods, across the U.S. over the 20 years ending in 2010, were just around $14 billion, according to the Insurance Information Institute. 
Travelers on its part has taken several initiatives such as the wind credit scheme for fortified homes in Texas, (See Travelers Promotes Safer Building Practices With Wind Credit Scheme) and we expect a significant improvement in its operating margin due to better underwriting and pricing strategies.
Investment Yields To Stay Low, But Will Recover Eventually
Aside from collecting premiums, Travelers invests in corporate and government investment grade bonds. The yields from these bonds are highly sensitive to interest rates. The Federal Open Market Committee recently indicated that short-term interest rates will likely be kept near zero till 2015, which will help keep the yield curve flat.  This will have a significant impact on Travelers as investment of insurance premiums account for 37% of our price estimate for the stock. We expect a gradual recovery in investment yields as the market conditions improve.
Travelers also invests in real estate assets with returns in the form of rental income or dividends from real estate investments. The housing industry in the U.S. has shown a significant improvement this year, with mortgage delinquency rates dropping to a seasonally adjusted average 7.4% – the lowest since the recession in 2008.  We expect the yields from the real estate assets to rise steadily through our forecast period.
We have a price estimate of $69 for Travelers, which is about 10% above the current market price. You can gauge the effect of a change in the forecasts by modifying the interactive charts above.Notes: