Travelers Earnings Preview: Business Growth, Underwriting In Focus
The Travelers Companies, Inc. (NYSE:TRV), one of the largest property and casualty insurers in the U.S., is scheduled to report its fourth quarter 2014 earnings on Thursday, January 22. [1] [2] We expect better macroeconomic indicators in the U.S. to allow for growth in the business, but it will be important for the company to strive for lower combined ratios across insurance lines, something it has had success with in the past. The company’s combined ratio (claims expenses to premiums) climbed from 85% in the first quarter of 2014 to over 90% in Q3. Also, its claims and adjustments expenses increased from $9.9 billion in Q3 2013 to $10.6 billion by the end of September 2014. A fall in net favorable prior year reserve development and weather related losses led to a decline in underwriting profitability. However an increase in pricing did partially offset the downward trend. In this note we review the key trends that will have a bearing on the company’s Q4 performance.
We have a price estimate of $109 for Travelers’ stock, which is slightly above the current market price.
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Business Insurance
Business insurance, which includes workers’ compensation, commercial automobile, fidelity and other insurance products, is the most important division for the company. It accounts for nearly two-thirds of the company’s total revenues. Improving macroeconomic indicators signify a potential boost for the property and casualty insurance business in the commercial segment. U.S. GDP recorded 5% growth in Q3 2014 and is expected to sustain that momentum in the last quarter. [3] The workers’ compensation product line is expected to benefit from rising demand for business insurance products as the job market improved. According to the latest data released by the Bureau of Labor Statistics, the unemployment rate fell to 5.6% at the end of December. [4] These improving trends bode well for the company, which is the largest insurer in workers’ compensation in the U.S. with a market share of over 8% in terms of premiums earned. [2]
Travelers invests a considerable portion of its revenues from premiums in fixed maturity securities such as government and corporate bonds. Net investment income for the first nine months of 2014 increased by about 8% compared to a year ago. The 10-year Treasury bond yield, a benchmark of prevailing interest rates in the country, has remained low at around 2% even after the Federal Reserve ended its quantitative easing program. [5] [6] We expect the company’s investment returns to remain subdued as long as interest rates remain low, something that the company will look to make up for with premium increases.
Personal Insurance
The company offers homeowner’s multiperil and personal automobile insurance within this division. During the previous quarter, catastrophe-related losses had a negative impact on the company’s operating income as well as the combined ratio. Underwriting in this division has remained more or less stable, with the combined ratio for the first nine months of 2014 at 89.8% compared to 89.5% a year ago. This was a result of the combined effects of pricing changes and expense reduction initiatives undertaken by the company, but also offset by growth in newer business.
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- Q4 2013 The Travelers Companies, Inc. Earnings Conference Call, Investor Relations [↩]
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2013 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩] [↩]
- Gross Domestic Product: Third Quarter 2014 (Third Estimate), Bureau of Economic Analysis [↩]
- Labor Force Statistics from the Current Population Survey, Bureau of Labor Statistics [↩]
- Daily Treasury Yield Curve Rates, U.S. Department of Treasury [↩]
- The Fed Eases Off Tapering to the End of a Gigantic Stimulus, Bloomberg [↩]