Travelers Earnings Preview: Job Market, Underwriting Discipline To Drive Q2
The Travelers Companies, Inc. (NYSE:TRV) is scheduled to report earnings for the second quarter on Tuesday, July 22. [1] Travelers, with a market share of 4.22% in terms of net premiums earned, is the fifth largest property and casualty insurer in the U.S. Total property and casualty insurance premiums in the U.S. were over $530 billion in 2013. ((NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM)) We expect the company to maintain or even improve its underwriting profits and also report an increase in revenues from several product lines.
In the previous quarter’s earnings, the company beat market expectations as it performed well on multiple fronts. Investment income was up 7% due to strong returns from private equity and real estate partnership investments. [2] The company had a combined ratio of 85% in the first quarter of 2014, an improvement over the previous year [3] due to its tight underwriting standards. The combined ratio is the ratio of the losses incurred on claims to premium income. Travelers has maintained a high retention rate of over 80% and a renewal premium change of about 7-8% for the last year. [4] We expect similar trends this time around, with the company increasing premiums fees and maintaining an underwriting profit to offset lower investment income.
Our price estimate for Travelers is $105, about 10% ahead of the current market price.
See our full analysis of Travelers here
Business and Financial Insurance: Lower Unemployment To Drive Growth
Around 60% of the company’s total revenues and 70% of the operating income comes from the business and financial insurance division. Worker’s compensation is the main commercial insurance product offered by Travelers, which accounts for nearly 30% of the net premiums written within the business insurance division. Travelers is also a market leader for the product in the U.S., owning an 8% market share. As it covers employers for workplace injuries to employees, the product’s performance is heavily dependent on the health of the U.S. job market. The unemployment rate has declined considerably over the past year, from 7.5% in April 2013 to 6.3% in April 2014, further dropping to 6.1% in June 2014 with the addition of about 288,000 jobs. [5] Accordingly, we expect to see total premiums in the market increase, with workers’ compensation driving much of Travelers’ growth.
However some economic uncertainty remains, as GDP grew by over 2% in the December quarter but contracted by 1% in the subsequent quarter, which could weigh on the division’s overall performance.
Personal Insurance
Personal insurance contributes around 30% of the company revenues, and includes personal automobile and homeowners’ insurance products. Travelers is the tenth largest insurer in this product line, holding a share of 1.75% in 2013 compared to market leader State Farm’s near 20% share. The recovery in the automobile sector in the U.S. has been gradual, and likely to have a moderate impact on the results.
Growth in homeowners’ insurance is determined to a large extent by the housing market, as a greater number of homeowners will generally result in an increase in the number of policies (though premium rates also have an impact on the market size). For instance, the housing market recovery contributed to the growth in homeowners’ insurance premiums from $71 billion in 2010 to $80 billion in 2013. The housing sector, which has started to bounce back from the lows following the recession, recorded a 6% increase in housing starts for May 2014, and a 7.5% increase in June 2014 compared to the respective months in 2013. [6] This indicates an opportunity in the homeowner’s insurance market for the company going forward.
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- Q2 2014 The Travelers Companies, Inc. Earnings Conference Call, Investor Relations [↩]
- The Travelers Companies’ CEO Discusses Q1 2014 Results – Earnings Call Transcript [↩]
- 8-K SEC Filing [↩]
- Seeking Alpha, Earnings Call Transcript Q1, 2014 [↩]
- Bureau of Labor Statistics [↩]
- U.S. Department of Housing and Urban Development, Joint Release July 17 2014 [↩]