Will Travelers Earnings Growth Keep Up With AIG and Progressive?

Travelers (TRV 1.86%) will release its quarterly report on Tuesday, and after a brief setback, the Dow component has climbed back toward all-time highs reached earlier in the year. Yet Travelers earnings continue to be exposed to the changing fortunes of the bond market, and competition from American International Group (AIG 0.56%) and Progressive (PGR 0.30%) could put a lid on the amount of growth Travelers can manage in the years ahead.

Travelers offers a wide variety of different insurance lines, boasting an especially strong presence in the commercial auto and workers' compensation areas. Yet Progressive is challenging Travelers in the commercial auto space with innovations designed to help get a better handle on true claims risk. AIG is also continuing to rebound sharply, with substantial competition in the workers' comp space. With both AIG and Progressive expected to see faster long-term growth, can Travelers stock hold up? 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.

Stats on Travelers

Source: Yahoo! Finance.

How fast can Travelers earnings grow?
In recent months, analysts have gotten a lot more excited about Travelers earnings prospects. They've boosted their third-quarter estimates by 25% and added almost $1 per share to their full-year 2013 expectations. The stock has enjoyed modest gains of about 3% since mid-July.

Travelers scared investors early in the quarter with its second-quarter results, which sent the stock downward even though net income soared by 85%. The problem Travelers faced was that its book value fell, as rapidly rising interest rates crushed the value of its $63 billion bond portfolio. Overall, a drop in unrealized portfolio gains of $1.77 billion pointed to the potential damage Travelers could take if rates continue to rise. AIG also reported a substantial hit to book value as a result of bond rates.

But Travelers, AIG, and Progressive have all benefited from favorable loss experience. In particular, an almost nonexistent Atlantic hurricane season has led to minimal losses from U.S. storms. That's in stark contrast to past years, with Hurricanes Irene and Sandy having wrought devastation across the Northeast and caused huge financial losses for Travelers and its peers. Moreover, even some of the more publicized weather events shouldn't cause big problems for Travelers, as flooding in Colorado is subject to flood exclusions that will largely leave federal flood-insurance programs on the hook for damages.

One problem, though, has come from competition in the personal auto market. As Fool contributor Jessica Alling noted in her preview of Travelers earnings, Progressive has worked hard to incorporate vehicle-use data into its underwriting policies, allowing it to tailor pricing to safety records. Travelers found that customers are very price-sensitive, and as a result, it has only a fraction of the market share in the area that Progressive has.

In the Travelers earnings report, look to see if stabilizing bond rates push Travelers' investment income back in the right direction. The lack of that hit to book value could give Travelers earnings a big boost to hold American International Group and Progressive at bay.

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