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Dow-30 Earnings: The Travelers Companies - Third Quarter 2013
Property/Casualty insurance giant Travelers (TRV - Free Travelers Stock Report) reported very good news for the September quarter. Specifically, operating earnings per share, which excludes capital gains and losses from the investment portfolio, came in at a record of $2.35, which was sharply above our $1.65 estimate and bested the strong year-earlier tally of $2.22. TRV stock increased, albeit modestly, following the earnings release.
Net premiums earned were strong, at $5.67 billion, which was above our $5.60 billion expectation. The insurer benefited from solid rate increases across most product lines, which has become commonplace in a strengthening property/casualty (P/C) insurance market. However, what really drove the stellar earnings growth was the combined ratio, which came in at 88.9% on a GAAP basis for the interim. This was a 140 basis-point improvement over the year-earlier tally and implied that the company generated more than $11 in underwriting profits for every $100 in policies insured. These positive factors helped to combat a 9% year-to-year decrease in net investment income, to $657 million. This line item has been constrained by low reinvestment yields on fixed-income securities, reflecting the Federal Reserve Bank's easy monetary stance.
Reflecting the recent positive earnings report, we have increased our full-year 2013 share-net estimate. We now look for earnings of $8.80 a share for the year, a $0.70 increment from our previous view. The increase reflects the strong third-quarter performance, as we have left our fourth-quarter view unchanged, at $2.01 a share. But this still represents a strong improvement over the year-before tally of $0.72. The hurricane season (ends November 30th) has thankfully been quiet thus far, which has helped boost Traveler's bottom line.
We have left our share-earnings estimate unchanged for next year, at $7.90. Though this is a decrease from this year's probable tally, we feel this requires an explanation. Catastrophes (a single event that results in insured losses of more than $25 million), have been at historically low levels so far in 2013, and we believe this will be difficult to sustain longer term. Thus, though we are cautiously optimistic about the broader P/C insurance market over the next 12 to 18 months, we expect a less favorable combined ratio over that period.
For the 3- to 5-year pull, we believe Traveler's healthy balance sheet (moderate debt level and ample reserves) and strong underwriting ability place it in a solid position to benefit from likely continued attractive conditions in the insurance market. Our outlook is based on decent domestic economic fundamentals over that period. This should result in continued price increases across most product lines, thanks to favorable supply/demand fundamentals. Furthermore, we look for investment income to trend higher out to 2016-2018 as short-term interest rates eventually increase. This would help boost Traveler's share net over that time frame. Though the combined ratio should still remain profitable (under 100%) over the long term, it might well rise from current unsustainable (from our view) levels.
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.