3 Big Trends You Need to Know for Earnings Season

Source: TRV earnings report.

Want to save some time during earnings season? Instead of reading each and every insurer's earnings report, take a minute to consider these three topics from Travelers' (NYSE: TRV  ) earnings for an easy guide of what's to come.

1. High demand, low cost
One of the most competitive markets within the insurance industry is the personal auto space. A new product initiative was key for the fourth quarter's success, since Travelers has consistently been a straggler in terms of market share for personal auto policies:

Insurance Company Personal Auto Market Share (2012)
State Farm 18.4%
Allstate (NYSE: ALL  ) 10%
Berkshire Hathaway (NYSE: BRK-B  ) 9.6%
Progressive (NYSE: PGR  ) 8.27%
Travelers Companies 1.94%

Source: NAIC Top 25 Property and Casualty Insurers 2012.

Quantum 2.0 is Travelers' newest offering -- a low-cost, low-commission product offered through independent agents. Though the company won't consider offering a product at low prices to drive volume in exchange for its target returns, the new product highlighted the continued demand from consumers for low price coverage.

The demand also comes from agents, who helped develop Quantum 2.0 after expressing elevated interest in the product's concept. The low commission structure may have initially been considered a downside for agents, but the heightened demand from customers has resulted in positive reception of the product since its launch in Oct. So far, Quantum 2.0 is offered in 18 states.

One of the best ways auto insurers have found to keep costs down is to eliminate agents altogether. Through direct sales to customers, Berkshire Hathaway's Geico operations have gobbled up a huge chunk of the market over the past 10 years. The direct selling also allows companies to better persuade customers to try their use-based technology, like Allstate's DriveWise and Progressive's Snapshot.

Travelers' "Direct to Consumer" segment within its personal auto division was the only one to have a positive sales trend during the fourth quarter. Though the new Quantum product boosted sales overall, the direct approach still delivered better results.

2. Interest-ing
It's no secret that the low-interest-rate environment has put a strain on insurers' ability to generate investment income. During the company's second-quarter earnings call, Travelers CFO Jay Benet stated that if the current rates remained the norm, a $25 million adverse effect should be expected each quarter because of poor reinvestment rates.

Since then, interest rates have risen marginally, but the impact can still be seen hitting insurers' bottom lines:

Company Quarterly Impact % change vs 2012 quarter
American International Group (NYSE: AIG  ) $48 million (4%)
Allstate $17 million (17%)
Progressive $1.6 million (1%)

Source: Company 10-Q reports; Results are as of Sept. 30.

The biggest culprit is a lack of fixed-income investment opportunities offering comparable yields to the insurer's previous investments that have matured. All of the insurers listed in this article, with the exception of Berkshire Hathaway, have a majority of their investment portfolios in fixed income or fixed maturity securities, making them sensitive to the interest-rate pressure.

Until interest rates normalize, investors can expect to see either declines or marginal gains in terms of investment income for the majority of the big insurers.

3. It's a catastrophe
The results from Travelers were boosted by a complete lack of meaningful catastrophic losses.

Hurricane Sandy wreaked havoc on the East Coast during the fourth quarter of 2012. Travelers reported a $1 billion loss in association with the storm -- much like most of its competitors. But during the last three months of 2013, the insurer experienced only a little more than $50 million in catastrophic losses.

The impact of the disparity was widespread for Travelers but most notable in its combined ratio. Overall, the company's combined ratio dropped 17.7 points to 87.7%, almost entirely because of the lack of catastrophic losses.

Investors should expect to see similar results from the remaining insurance field, but approach with caution. On the surface, the massive declines are great news, since it would mean that the companies are keeping more of the premiums they charge. But be sure to look at the underlying combined ratio, which excludes reserves development and catastrophic losses. With those two items, the picture will be dramatically different.

Industrywide
With the number of huge insurers reporting each quarter, it can be a daunting task to try to disseminate all of the information that's available. But luckily, you can find some of the biggest trends within the first few reports, providing a thread that ties the industry together in a neat bundle.

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