Travelers Earnings Preview: Underwriting Profitability, Business Growth In Focus
The Travelers Companies (NYSE:TRV), the fifth-largest property and casualty insurer in the U.S., is scheduled to report earnings for the second quarter on Tuesday, July 21. [1] During the company’s second quarter earnings release, its underwriting performance will be in focus. Despite being a disciplined underwriter, Travelers faced a tough first quarter due to prolonged winter conditions. This underwriting performance, coupled with low investment returns, caused a sharp decline of 21% in net income compared to a year ago. The combined ratio, the ratio of claims to premiums earned, climbed to 88.9% during the first quarter, compared to 85.7% a year ago. During the second quarter, we expect improving macroeconomic conditions to aid growth in business across divisions. However, investment income will still face heat from the persistent low interest rates, which could have an impact on Travelers’ earnings during the quarter.
In this note, we take a look at the key factors that will drive the upcoming earnings for Travelers. We have a price estimate of $113 for Travelers’ stock, which is about 10% higher than the current market price.
See our full analysis of Travelers here
Expect Growth In Business Insurance
The company’s business and financial division includes worker’s compensation, commercial automobile and general liability products. The worker’s compensation line, which is one of the most important product lines for Travelers, is significantly affected by employment activity. The unemployment rate has been on a consistent decline in the U.S., declining to 5.3% in June from 5.5% in March. [2] It was above the 6% mark during same period last year. This is a good indicator for growth in this line of business for Travelers. We expect improving macroeconomic conditions to benefit the workers’ compensation insurance market, and Travelers being the leader in this segment should be able to benefit from the economic recovery. 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.
In the business insurance division, higher catastrophe-related losses led to a combined ratio of 93.3% in Q1 2015 compared to 89.2% in Q1 2014. We expect to see an improvement on this front, as the second quarter did not face the adverse weather conditions seen in the first quarter.
Will Personal Insurance Keep Growing?
In the personal insurance domain, Travelers offers automobile insurance and homeowners’ insurance to individuals across the U.S. The company has a market share of 2% in the highly competitive auto market and 5% in the homeowners’ market. The personal automobile insurance line added 21,000 new policies during the quarter on the back of a strong performance from Quantum Auto 2.0. 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. Automobile sales in the U.S. showed a mixed performance in the second quarter. Initially, sales dropped from 17.1 million units (seasonally adjusted light vehicle sales) to 16.5 million in April. Thereafter, sales rose to 17.7 million in May but again declined to 17.1 million units in June. ((Auto & Truck Sales – Bureau of Economic Analysis)) We will be keeping a close watch on how Travelers’ will perform in this market.
Growth in homeowners’ insurance is determined to a large extent by the housing market. Housing starts increased from below 1 million to about 1.2 million in April, and the U.S. Department of Housing and Urban Development estimates that they were about 1.1 million in June. [3] We expect Travelers to benefit from growth in the housing sector, and will be closely following the company’s performance in the segment during the second quarter.
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