The Travelers Companies, Inc. (NYSE:TRV) is expected to announce earnings for the fourth quarter Tuesday, January 22. The company’s top line will be impacted by the devastation caused by Superstorm Sandy, which struck the East Coast of the U.S. in late October. The company estimates insurance claims expenses from the storm to be around $650 million.  Despite this setback, we expect Travelers to maintain the revenue growth it observed through the first nine months of the year.
Our price estimate of $70 for Travelers’ stock is in line with the current market price.
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Loss From Sandy
Catastrophe related losses account for about 10% of Travelers total claims and expenses. In 2011, natural disasters like Hurricane Irene and Tropical Storm Lee, led to catastrophe related losses of around $1 billion. The operating margin for the business insurance division fell from 17% in 2010 to 12% in 2011, while the operating margin for personal insurance fell from 6% to a 4% loss.
The business insurance division reported catastrophe losses of $360 million for the first nine months of the calendar year. Given the estimate provided by the company, we expect an operating margin of around 15% for the fiscal year.
The catastrophe related losses reported by the personal insurance division through the first nine months of 2012 totaled $450 million. We expect an operating margin around 6% for the fiscal year. For a detailed analysis of the operating margins and the affect of Superstorm Sandy, please read our article: The Market Has Overreacted To Travelers’ Revised Sandy Estimates.
To mitigate the effects of the losses incurred by Travelers due to Hurricane Irene and Tropical Storm Lee, the company had to undertake several pricing initiatives. Insurance rates increased by almost 8% through the first nine months of 2012, but the company was still able to maintain high retention rates, close to 80% in the business insurance division. This allowed a 3% growth in business insurance premiums. Given the company’s historical performance, we expect it to maintain premium growth. However, there are more than 2,500 property and casualty insurers in the U.S. and the highly competitive nature of the market will lead to a slight decline in Travelers’ market share in the coming years.
Importance Of Investments
Although Travelers earns just 12% of its revenues from returns on investments, it is important for the company to invest premiums earned. Looking at the 2011 figures, we can see that Travelers earned about $22 billion in premiums and had to pay around $24 billion in claims. The $3 billion it earned from investment income allowed the company to maintain a profit for the year.
Most of Travelers investments are in fixed maturity securities like government bonds, which account for 85% of the net investment income with a yield of around 4%. However as the Fed has stated that interest rates will be kept low for the next few years, we expect a slight decline in yield in the coming years, with a recovery coinciding with an improvement in macro-economic conditions.Notes: