Travelers Companies (NYSE:TRV) will release its Q3 earnings Wednesday, October 19. We expect the company to report a profit after recording high losses in Q2 due to tornado catastrophes. Earnings will likely be weak as catastrophe losses in the third quarter and low interest yields on its investment portfolio weigh on revenue growth. Its competitors include The Chubb Corporation (NYSE:CB) and American Financial Group (NYSE:AFG).
We maintain our price estimate for Travelers at $55.90.
Catastrophe losses may hold back increases in revenue
Catastrophe losses this year have been unprecedented with insurers’ net loss and loss adjustment expenses in first half totaling approximately $24 billion, compared to $8 billion in the first half of 2010.  The third quarter saw its share of disasters ranging from Hurricane Irene to wildfires and earthquakes.  This means higher claims for the company that may reduce its earnings.
Though revenue from premiums have been rising in the past quarters and is expected to increase further due to higher losses suffered by insurance companies this year, the losses from catastrophes will likely downplay this growth in revenue.
Low interest rates likely to strain investment revenue
A major portion of insurance companies’ business is the reinvestment of insurance premiums. This accounts for 16% of our valuation for Travelers.
The return on fixed income investments was 4.8% in 2008 and gradually dropped to 4.3% in 2010. We expect returns on fixed income investments to experience more downward pressure and drop to about 4% in 2011 and 3.6% by the end of 2012.
This decline comes as the company is heavily invested in investment grade bonds and in the present low interest environment, the returns on these bonds are lower than historical norms. We expect the current economic scenario and unstable market to pressure Travelers’ returns on its investment portfolio.Notes:
- Property/Casualty Insurers’ Profits and Profitability Tumbled in First-half 2011 as Catastrophes Ravaged Underwriting Results, ISO [↩]
- Catastrophes: Insurance Issues, Insurance Information Institute [↩]