Key Takeaways And Trends From Travelers’s Q1 Results

by Trefis Team
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The Travelers Companies (NYSE: TRV) reported mixed first quarter results, as revenue beat market expectations but earnings per share missed by a wide margin. Consequently, the stock price has dipped about 4%. Insurance companies can see earnings fluctuations due to some unpredictability related to claims, and this quarter was an example of that. Higher than expected catastrophe losses due to storms in March hurt the company’s earnings. That said, we continue to focus more on the company’s strengths. Revenues grew by 5% year-over-year to $7.3 billion, largely driven by premium growth across segments. Also, the overall combined ratio improved from 96% in Q1’17 to 95.5% in Q1’18. Moreover, despite the negative reaction from investors, the company’s EPS actually increased 11.5% year-over-year to $2.42.

We have a $147 price estimate for Travelers, which is ahead of the current market price. Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key takeaways from Travelers’s Q1.

Premium Growth Across Segments; Improved Combined Ratio

Two critical metrics for an insurance company are the net written premium (NWP) and Combined Ratio. Travelers saw improvement in both.

  • Business Insurance – The company’s largest segment saw 4% growth in NWP, driven mainly by higher renewal rates and a strong performance from automobile and property businesses. However, the segment’s Combined Ratio deteriorated by 110 basis points on account of higher catastrophe losses.
  • Personal Insurance – Agency Homeowners and Agency Automobile continue to deliver solid results with premium growth of 5% and 9%, respectively. As a result, the segment saw 8% growth in NWP. Moreover, favorable reserve development and rate actions in the Agency Automobile business resulted in a 210 basis point improvement in the Combined Ratio.
  • Bond & Specialty – The 6% NWP growth in the segment was primarily driven by renewal premium change and record retention rate of 89%. Again, favorable PYD helped improve the Combined Ratio by 470 basis points.

Future Outlook

We expect the company to see modest growth in Q2’18, largely due to organic growth in premiums. Pricing increases in the Automobile category and Policy-In-Force (PIF) growth in the Homeowners category will likely drive the growth in the Personal Insurance segment. Also, a large part of the company’s fixed income portfolio is in investment grade, which helps the company to generate stable investment income, and we expect this to continue in the coming quarters. Furthermore, with commercial property insurance potentially set to rise in 2018, largely due to catastrophes in 2017, Travelers should experience moderate growth in the Business Insurance segment.

We expect the company to generate about $7.4 billion in revenue in the second quarter. Furthermore, we expect Traveler’s net margin to slightly improve in the near term due to robust cost management efforts and strong underwriting results. We forecast net income of about $717 million, or EPS of about $2.64.

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