Travelers Earnings Preview:Expect Business Growth, But Claims To Rise
The Travelers Companies, Inc. (NYSE:TRV) is scheduled to report earnings for the first quarter of 2014 on Tuesday, April 21st. [1] A prolonged winter accompanied by snow storms that hit the north-eastern part of the U.S. during the first three months of 2015 will have an adverse impact on the property and casualty insurance industry as a whole. However, due to Travelers’ strict underwriting discipline we expect the company to be able to avoid any major negative impact overall. Additionally, improvement in macroeconomic parameters is likely to aid business growth. In this note we take a look at different parameters that will affect the company’s first quarter results.
We have a price estimate of $112 for Traveler’s stock, which is slightly higher than the current market price.
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Lower Unemployment Will Benefit Business Insurance Division
The company’s business and financial division includes worker’s compensation, commercial automobile and general liability products. Worker’s compensation line, which is one of the most important product line for Travelers, is affected by employment activity in the economy. Of late unemployment has fallen to a low of 5.5% in February and March, compared to about 6.5% last year during the same period. [2] This bodes well for Travelers as worker’s compensation products are most commonly used in manufacturing workplaces. We expect the workers’ compensation insurance market to benefit from these recovering conditions, and the company should be able to leverage its strong brand and leadership position in the segment. Currently with a share of roughly 8% in terms of net premiums earned, Travelers is the largest player in the worker’s compensation insurance product line in the U.S. market.
Personal Insurance Not Quite Upbeat
Within the personal insurance space, Travelers offers coverage for automobiles and homeowners’ lines. 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. Housing starts have seesawed during the past couple of months. Compared to 2014, starts in the first three months of 2015 have been lower. After a decline in the total number of starts in February compared to January 2015, they picked up by about 2% to seasonally adjusted rate of 926,000 in March. [3] We expect this to be reflected in the upcoming earnings release. Travelers is among the largest players in this space in the U.S. with 3.83% market share.
Personal automobile insurance premium volume in the U.S. has grown at a steady pace of over 3.5% over the last three years. This has come on the back of a recovery in the U.S. economy as well as better consumer sentiment. During the first quarter of 2015, the automobile industry has seen a growth of 5.6% in sales. [4] This indicates positive growth for insurance demand as well. We will be keeping a close watch on Travelers’ performance in this space in the upcoming earnings release.
Inclement Weather Will Weigh On Underwriting
During the first quarter, north-eastern parts of the U.S. experienced inclement weather conditions in the form of a prolonged winter and severe snow storms. Last year, during the first quarter Travelers suffered from catastrophe losses due to severe winter conditions. We expect the company to experience losses this year as well. However, given lesser severity this year round we expect catastrophe related losses to be lower. We expect it to have some impact on the company’s otherwise strict underwriting discipline. We will be closely tracking important metrics such as the combined ratio, ratio of claims to premiums; retention and renewal rates.
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Notes:
- Q1 2015 Quarterly Results Conference Call, Investor Relations [↩]
- U.S. unemployment data, Bureau of Labor Statistics [↩]
- U.S. Department of Housing and Urban Development, Release April 16 2015 [↩]
- Toyota Gains in Mixed Month for U.S. Auto Sales, The Wall Street Journal [↩]