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Dow-30 Earnings: The Travelers Companies - First Quarter 2013
Travelers (TRV - Free Travelers Stock Report), a leading provider of property/casualty (P/C) insurance, reported strong results for the March quarter of 2013. Specifically, operating earnings per share, which excludes capital gains and losses from investments, came in at $2.31, a nearly 15% increase from the year-earlier tally. This occurred, despite a slight decrease in net premiums earned, year over year.
The primary factor behind the strong performance, which has resulted in TRV stock trending higher in trading this morning, is a 370 basis-point improvement in the combined ratio (the sum of the loss and expense ratios), to 88.5%. This implies that the company generated $11.50 in underwriting income for every $100 in policies insured. We attribute the strong underwriting margin to three factors. First, catastrophes were only 1.8% of the loss ratio for the March 2013 period, a decent improvement over the prior year where it accounted for 3.1% of that line item. Second, management's savvy underwriting ability likely helped the loss ratio, as the company focused on margins (better pricing and terms & conditions), with less emphasis on writing business for the sake of writing business. Last, a tight rein on costs aided the expense ratio during the interim.
Investment income per share declined by about 9.5%, year over year, which doesn't come as a surprise to us. Though cash flow from operations came in quite strong, low reinvestment yields on fixed-income securities tempered results. (Insurers keep the majority of their investment portfolio in bonds due to their conservative bent.)
In other news, the Board of Directors increased the quarterly dividend 9%, to $0.50 a share. What's more, the company bought back 3.7 million shares during the period, for $300 million. Return on shareholders' equity was 14.1%, a 100 basis point improvement from the year-earlier tally.
We are increasingly bullish on our short-term view of the company. We have boosted our 2013 and 2014 share-net estimates by $0.40 and $0.20, respectively, to $7.55 and $7.65. We look for the combined ratio to trend higher than the industry average, and it should remain in positive territory, barring an overage of catastrophes. Furthermore, we look for low to mid-single digit gains in the top line over the next two years, as pricing firms across most product lines. More precisely, rate gains should continue to exceed cost inflation across all segments, while renewal rates should increase in the mid-single digits in Business Insurance and about 10% in Commercial Accounts. Management will likely selectively add new business, with a focus on garnering policies that meet its stringent criterion.
Longer term, we continue to like the Travelers story. We project decent increases in premiums earned and net investment income per share, along with a profitable combined ratio, assuming loss trends continue at about their historical average. We also look for annual dividend increases and share repurchases to help enhance shareholder value 3 to 5 years hence. In aggregate, these shares offer worthwhile risk-adjusted total-return potential for the pull to 2016-2018. They have historically performed fairly well relative to their insurance peers in difficult markets, which we attribute to the company's immense size and a strong management team.
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.