Travelers Companies Inc Earnings: Are Storm Clouds Looming?

On Tuesday, Travelers (TRV -0.41%) will release its quarterly report, and investors have become increasingly nervous about whether the insurance giant can keep delivering the strong earnings results they've seen over the past year. Travelers has enjoyed the relatively benign environment for catastrophic losses, with a big drop in major weather events last year having driven big improvements compared to where Travelers was two or three years ago. Yet favorable loss experience has also increased competition, and Allstate (ALL -1.72%), AIG (AIG 0.05%), and other insurance players are working hard to capture greater market share even at the expense of premium margins.

The experience Travelers has gone through lately shows how hard it is for investors to navigate the insurance world. Shareholders routinely punish insurance stocks when big loss events happen, yet the long-term impact is often to widen margins and improve long-term profitability. By contrast, quiet times seem like the best of all possible worlds for Travelers and its peers, yet they then find themselves in an ultra-competitive pricing environment that makes it hard to sustain profitability. Let's take an early look at what's been happening with Travelers over the past quarter and what we're likely to see in its report.

Source: Travelers.

Stats on Travelers

Source: Yahoo! Finance.

What's the next step for Travelers earnings?
Analysts have gotten more optimistic in recent months about Travelers earnings, holding first-quarter estimates constant but raising full-year projections for the next two years by 1.5% to 2%. The stock hasn't really gone anywhere, though, falling less than 1% since mid-January.

The Travelers fourth-quarter report showed just how strong the insurance giant has looked lately. Earnings per share tripled from the year-ago quarter, with investment income climbing due to higher interest rates and sales income climbing in all of Travelers' insurance segments. Yet investors were quick to discount the results, pointing out that they came in yet another period during which catastrophic losses were few and far between.

In order to take advantage of good times now, Travelers has sought to get more out of its business going forward. The company is aiming to refocus its capital on higher-return products, with the aim of having gotten more than two-thirds of its premium income from products producing a return of between 10% and 20%, and nearly a fifth from products with 20% or better returns. By realigning its business to grab low-hanging fruit, Travelers can be more profitable even as conditions in the insurance industry return to normal.

But a big problem that Travelers will face comes from the efforts of AIG, Allstate, and other insurance rivals seeking to cash in on the same positive conditions that have helped Travelers. AIG has made an almost complete recovery from its near-death experience during the financial crisis, and its emphasis on property and casualty insurance goes directly up against Travelers in its areas of strength. At the same time, even as Travelers makes efforts to bolster its presence in personal lines, Allstate and other companies have pushed hard to capture market share in hot areas like personal auto insurance.

In the Travelers earnings report, look beneath the earnings comparisons at the core strength of the company's fundamental insurance business. Travelers will face tough comparisons throughout 2014, but as long as it takes care of its internal operations, it should do well compared to Allstate, AIG, and its other insurance peers.

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