How Will Travelers Recover After Catastrophes Hurt Q2 Earnings?

by Trefis Team
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TRV
Travelers
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The Travelers Companies (NYSE: TRV) reported mixed second-quarter results, as revenue beat market estimates but earnings per share at $1.81 missed the expectations by a wide margin. Consequently, the stock price dipped by about 4% on the day of earnings but has recovered since. 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 and an incremental $45 million charge associated with large commercial losses hurt the company’s earnings. As a result, the combined ratio deteriorated to 98.1% for the quarter. That said, we continue to focus more on the company’s strengths. Revenues grew by 4% year-over-year to $7.48 billion, largely driven by premium growth across segments.

We have a $147 price estimate for Travelers, which is ahead of the current market price. Our interactive dashboard of Travelers’ earnings details our forecasts and estimates for the company. Below we outline Travelers’ future outlook.

Net Written Premiums To Foster Growth

Two critical metrics for an insurance company are the net written premium (NWP) and combined ratio. As mentioned before, Travelers’ combined ratio was hurt because of catastrophe losses. However, NWP grew 7.1% to reach $7.13 billion in Q2, a record high for the company. The company saw NWP growth across all its segments, which is a good sign going forward. Given the company’s focus to improve its underwriting process, NWP growth will likely bring profitability growth in the future.

We expect the Personal Insurance segment to be a strong contributor in the upcoming quarter. The recent losses could prompt the company to increase renewal pricing in the homeowners category. This, along with growth in the automobile category, will likely drive growth in the segment. Meanwhile, the company plans to rollout Quantum Home 2.0, a homeowners insurance product that provides flexible coverage options, in six more states. This should provide a boost to the company’s top line, as the product has been gaining traction among customers. Moreover, the success of personal line auto products in Canada, along with the introduction of new suites of services, bodes well for the business.

In Business Insurance, high retention rates and new business should continue to drive growth in Select Accounts and Middle Markets. That said, the company’s performance in National Accounts and National Property has been on a decline over the past few years. Though these two markets did see growth in Q2, looking at the past trends suggest that this could slow down moving forward. Meanwhile, a large part of the company’s fixed income portfolio is investment grade, which helps the company to generate stable investment income, and we expect this to continue in the coming quarter.

Margins Will Likely Improve

The catastrophe losses hurt the company’s earnings margins. The company, however, still managed to keep the combined ratio under 100%, which means underwriting profit. Given the unpredictability of natural disasters, this shows Travelers’ strength in underwriting efficiency and its efforts towards improving it further. One of the steps that it took in this regard was to initiate a pilot program that supports the local underwriting process by processing less complex accounts in centralized business centers. This not only has resulted in productivity gains for the company but also has freed up local underwriters who can now utilize their time to go after more complex account opportunities. This strategy, along with robust cost management efforts, will likely improve the margins in the upcoming quarter.

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