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Will Catastrophe Loss Impact Travelers' (TRV) Q4 Earnings?

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The Travelers Companies, Inc. (TRV - Free Report) is slated to report fourth-quarter 2017 results on Jan 23 before the market opens. Last quarter, the company delivered a positive earnings surprise of 139.47%.

Let’s see, how things are shaping up for this announcement.

We expect catastrophe loss arising from the recent California wildfires to weigh on underwriting results of the company. Such losses also render volatility to the company’s earnings. The Zacks Consensus Estimate for the period to be reported is pegged at $1.64, representing a year-over-year slump of 48.8%.

With respect to revenues, the Zacks Consensus Estimate is pegged at $7.1 billion, reflecting a year-over-year decline of 0.3%.

Travelers has projected a pre-tax catastrophe loss including estimated recoveries from reinsurance between $525 million and $675 million pre-tax or $340 million and $440 million after-tax. This will weigh on underwriting profitability, leading to deterioration in the company’s combined ratio.

Despite gradual improvement in interest rates, the company anticipates a fall in net investment income in the soon-to-be-reported quarter. Travelers estimates about $10 million or less of lower after-tax net investment income on a quarterly basis compared with that of 2016. Travelers has provided this estimate on the basis of the size of its fixed income portfolio, higher short-term interest rates along with specific securities, scheduled to mature through the end of next year. The Zacks Consensus Estimate for net investment income stands at $562 million, a 10.4% decline on a year-over-year basis.

Nonetheless, the company expects to see premium growth, primarily fueled by improving premiums across each business segment as well as successful marketplace strategies. The Zacks Consensus Estimate for net written premiums is pegged at $6.5 billion, indicating nearly 6.7% rise on a year-over-year basis.

A major contributor to the overall premium, Business Insurance segment has likely witnessed higher premiums, primarily fueled by strong production results in select and middle markets. This in turn will help boost the company’s revenues as well. The Zacks Consensus Estimate for Business Insurance revenues is $4.1 billion, representing an increase of 19.6% on a sequential basis.

Additionally, the company is estimated to have experienced high retention rates and an increase in new business across its commercial businesses.

Further, the company predicts improved profitability in auto business at its Personal Insurance segment owing to implementation of favorable pricing and underwriting actions. Also, the company is on track to achieve a double-digit renewal premium change on a written basis in the fourth quarter.

Earnings Whispers

Our proven model does not conclusively show that Travelers is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Travelers has an Earnings ESP of -10.69%. This is because the Most Accurate estimate is pegged at $1.47, lower than the Zacks Consensus Estimate’s $1.64. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

 

Zacks Rank: Travelers sports a Zacks Rank of 1, which although increases the predictive power of ESP. A company, however, needs a positive ESP to be confident about an earnings surprise. Thus, this combination leaves surprise prediction inconclusive.

We caution against all Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to surpass estimates this time around are as follows:

The Progressive Corporation (PGR - Free Report) is set to report fourth-quarter earnings on Jan 24 and has an Earnings ESP of +0.52%. The company is a Zacks #2 Ranked player. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

American Financial Group, Inc. (AFG - Free Report) has an Earnings ESP of +1.21% and a Zacks Rank #2. The company is set to announce fourth-quarter earnings on Jan 31.

Cigna Corporation (CI - Free Report) has an Earnings ESP of +0.86% and is a #2 Ranked player. The company is slated to release fourth-quarter earnings on Feb 1.

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