Travelers Earnings: What to Expect From the Insurance Giant

Travelers (TRV -0.41%) will release its quarterly report next Tuesday, and investors continue to remain impressed by the huge earnings growth that the insurance company has posted over the past year. With a continuing dearth of high-cost catastrophic events, Travelers earnings have benefited greatly. But the favorable conditions have also helped produce amazing growth for rivals Allstate (ALL -1.72%) and AIG (AIG 0.05%), raising questions about how long the favorable conditions in the insurance industry can last before pricing competition starts to weigh on profits.

Investors in the insurance industry are familiar with the cyclical oscillations that Travelers and its peers go through. From time to time, huge losses plague the industry, hurting short-term results, but also setting the stage for premium increases that boost future profits. Eventually, though, more favorable loss experience brings more participants into the industry, creating competition that puts pressure on pricing power and eventually causes profits to drop. The question investors face right now is whether Travelers is about to suffer a cyclical decline, or whether it can eke out another year or two of profit growth. Let's take an early look at what's been happening with Travelers during the past quarter, and what we're likely to see in its report.

Travelers' building, St. Paul, Minn. Source: Wikimedia Commons.

Stats on Travelers

Source: Yahoo! Finance.

Why Travelers earnings are rising so much
Analysts have gotten more excited about prospects for growth in Travelers earnings in recent months, raising their fourth-quarter estimates by more than $0.10 per share, and further raising their full-year 2014 projections by twice that amount. The stock has continued its ascent, with modest gains of 3% since mid-October.

Travelers' third-quarter earnings report showed just how strong an environment the insurer has enjoyed lately. The company posted record quarterly operating income per share, with improvement in underwriting margins, and gains in premium rates helping to bolster net written premiums slightly and keep profits flat compared to the year-ago quarter. Travelers cited low weather-related losses as helping its bottom line, and continued favorable experience could help the company during the fourth quarter, as well.

But Travelers continues to see some challenges in some of its insurance lines. Even though business insurance premium volume has consistently risen, personal insurance lines have seen decreases, with a 5% drop in the third quarter showing the difficulty that Travelers has had in competing against Allstate, Progressive (PGR -0.85%), and other companies that focus more on consumers rather than business clients. Moreover, as AIG regains strength following its difficulties during the financial crisis, Travelers will see it as more of a threat in capturing lucrative business lines that both companies would like to target in the future.

Still, Travelers is taking advantage of growth opportunities where it can find them. The company completed its takeover of Canada's insurance giant Dominion, giving it a greater international presence. Moreover, even as the company has to deal with the immediate short-term impact of higher interest rates on the value of its bond portfolio and its book value per share, Travelers could start to see rising net investment income fall through to help its financial results in the long run.

In the Travelers earnings report, watch for signs of pricing pressure on premiums starting to emerge. The good times won't last forever, but investors can hope that they'll persist a bit longer, and let Travelers reap the benefits of favorable loss experience after a horrible couple of years on the catastrophic-loss front.

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