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Dow-30 Earnings: The Travelers Companies - Second Quarter 2012
Travelers (TRV – Free Travelers Stock Report), a property and casualty insurance company, has reported second-quarter results that were a bit lower than we initially expected. We believe this requires an explanation, however. Operating earnings per share, which exclude capital gains and losses from the investment portfolio, came in at $1.26, which was $0.20 below our initial estimate. However, it should be noted that the industry suffered $10 billion in catastrophes related to natural disasters during the second period, which is significantly above recent trends. In fact, Travelers posted $357 million in catastrophe losses during the interim, which resulted in a combined ratio (the sum of the loss and expense ratios) of 100.5%. Although this compared favorably with the year-earlier figure of 125%, it still represented an underwriting loss for the period. Travelers shares traded marginally lower on the news.
That said, most of the company's other line items fared relatively well during the term. Net premiums earned inched higher relative to 2011, as rate increases and new business wins helped shore up the top line. What's more, though net investment income was modestly lower than last year's comparable tally, it was still solid, given the current low interest-rate environment. We believe investment income per share was at a decent level, owing to an increased pace of invested assets.
As a result of the recent news, we have reduced our bottom-line outlook by $0.20, to $6.15 a share. We also have scaled back our view for net premiums earned from $23.130 billion to $22.735 billion for the full year. However, it should be noted that our pared outlook is a result of the second-quarter showing, which was constrained largely by the aforementioned catastrophes. Indeed, we have left our expectations intact for the final two quarters of the year. Current business trends appear quite favorable for the broader P/C insurance industry and Travelers is no exception. Management noted that rates have increased for many product lines, while policyholder retentions have generally remained at attractive levels. The hefty amount of catastrophes during the June quarter should further facilitate rate increases during policyholder renewal season as insurers garner greater bargaining power.
We look for the insurance behemoth to post high single-digit annual earnings growth over the pull to 2015-2017. The top line should climb at a decent clip, as Travelers benefits from a likely upturn in the insurance cycle over that period. What's more, investment income should ultimately receive a lift from higher interest rates. Insurers keep the lion's shares of their portfolios in fixed-income instruments, and thus, higher interest rates would help boost their yield potential. We look for the company's combined ratio to remain at a profitable level, barring an overage of catastrophes, thanks to management's stringent underwriting measures. That said, some of the good news appears to be discounted in the current quotation, and these shares don't stand out for 3- to 5-year capital appreciation potential.
About The Company: The Travelers Companies, Inc. (formerly St. Paul Travelers) is a leading provider of commercial property/casualty insurance and asset management services. Following the April 1, 2004 acquisition of Travelers, the company is now a leading underwriter of homeowners insurance and automobile insurance through independent agents. USF&G was another notable acquisition, which was purchased in April of 1998.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.