Travelers Q3 Earnings Preview: Underwriting Performance, Retention Rates In Focus

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TRV: The Travelers Companies logo
TRV
The Travelers Companies

Travelers (NYSE:TRV) is scheduled to report third quarter earnings on Tuesday, October 21. [1] In the second quarter, the company reported a 2% year-over-year increase in revenues, while the operating income declined 18% to $673 million due to higher catastrophe-related losses. [2] The second quarter also witnessed record net written premiums of $6.2 billion, primarily due to the acquisition of Dominion of Canada towards the end of 2013. Revenues were up 2% year-over-year to $6.785 billion.

Going forward, it will be important for the company to maintain strong underwriting discipline, particularly in the low interest rate environment that has weighed on returns on investments. The company’s strong retention and renewal rates will also need to be maintained in order to avoid further falls in income.

We have a price estimate of $107 for the company’s stock, about 15% higher than the current market price.

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See Full Analysis for Travelers Here

Underwriting Performance Key

During the second quarter, a drop in net favorable prior year reserve developments adversely impacted the company’s combined ratio, which fell to 95.1% as compared to 94.3% in the prior year.  ((The Travelers Companies’ CEO Discusses Q2 2014 Results – Earnings Call Transcript)) Historically, Travelers has maintained underwriting profitability due to its strong underwriting discipline, and we expect that to continue.

The company’s renewal premium change, which is defined as the change in average premiums on policies that are renewed, remained positive throughout product lines for the first half of 2014. For the personal division, the company expects it to decline but still remain in the positive territory for the last two quarters of 2014. [2] For these reasons we expect Travelers to continue to maintain a combined ratio in the mid-90s during the third quarter.

Retention Rates Also Important

The company’s retention rate, which is defined as the percentage of policies or accounts renewed that were available for renewal in the given period, was about 81% in the second quarter. We expect it to remain healthy for the second half of 2014. [3]

Last quarter, Travelers expanded Quantum 2.0 in the automobile insurance line to 31 states from 18 earlier, resulting in increased business volume. [4] We will be keeping a close watch on how the company benefited in the third quarter from that expansion. The company had a retention rate of around 82% for the personal automobile business in the second quarter.

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Notes:
  1. Q3 2014 Earnings Conference Call, Investor Relations, Travelers Inc. []
  2. Company 8-K SEC Filing, July 22 2014 [] []
  3. SEC 10-Q Filing []
  4. Travelers Reports Second Quarter Net Income of $683 Million, Reuters []