Travelers Written Premiums Seen Rising -- Earnings Preview

   By Leslie Scism 
 

Travelers Cos. is expected to announce its fourth-quarter results before the market opens Thursday. Here are things to watch:

EARNINGS FORECAST: The consensus of analysts surveyed by Thomson Reuters is $2.54 a share of operating income, compared with $2.68 in the year-earlier period. In the insurance industry, the convention is to forecast earnings on an operating basis, which excludes realized capital gains and losses from insurers' big investment portfolios. Travelers' year-earlier quarterly operating profit reflected especially strong investment income and unusually low catastrophe claims.

WHAT TO WATCH:

--EYES ON PRICING TRENDS: Insurance-industry analysts closely monitor growth in premium, rather than overall revenue (which includes investments). Bernstein Research sees Travelers' net written premiums edging up about 2%. Even though the U.S. economy has shown signs of improvement, prices have been softening in the commercial property-and-casualty insurance industry in recent months, so analysts are eager for detail on developments. Earlier this month, a Barclays survey found commercial property-and-casualty buyers expecting industrywide prices to be flat to slightly down year-over-year. The survey also indicated that policy terms and conditions are weakening. Travelers is among the largest U.S. property-casualty insurers selling coverage for businesses, so analysts will be listening closely to what it has to say about pricing.

--PROFIT MARGINS: "People will start watching like a hawk the company's accident-year combined ratios to see if they can maintain the margins at the current level," said Josh Stirling of Bernstein Research. Underwriting discipline and expense management come into play here.

--MANAGEMENT OF CAPITAL: Bernstein Research notes that, with commercial-insurance pricing possibly turning negative in 2015, well-managed players like Travelers need to buy back stock to help keep results in line. Travelers prides itself on a big stock-buyback effort. In the year-earlier quarter, it returned to shareholders $1.2 billion of capital, including $1 billion in share repurchases.

--FEDERAL RESERVE & MOTHER NATURE: Insurers constantly have premium dollars to invest and they earn a substantial portion of their income from interest on their big bond-heavy investment portfolios. So ultralow interest rates create an earnings headwind. On the other hand, they were helped in 2014 by a quiet hurricane season in the North Atlantic. Analysts will want an update on how Travelers is dealing with low interest rates. Questions about how it is managing its exposure to catastrophes also are likely. And questions about terrorism risk also can be expected.

Write to Leslie Scism at [e-mail]

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