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Dow 30 Earnings: The Travelers Companies – Fourth Quarter 2011
Property/Casualty insurance behemoth The Travelers Companies (TRV – Free Travelers Stock Report), reported a year-over-year decline in operating earnings per share (excludes capital gains and losses from the investment portfolio) during the December period. More specifically, earnings came in at $1.48 a share, which was below last year's tally of $1.89 and our initial $1.63 estimate. The shares backtracked some after the earnings release. The primary reason for the year-over-year decline was a hefty number of catastrophes due to severe weather across many parts of the country. This resulted in a combined ratio (the sum of the loss and expense ratios) of 95.9% for the quarter, a 5.3% deterioration from the prior-year period. This implies that Travelers still generated more than $4 per share in underwriting income for every $100 in policies that it insured. For the full year, earnings were $3.25 a share, a sharp decrease from 2010's $6.31 tally.
The relative good news is that we have left our estimates unchanged for the year just begun, at $5.80 a share. We look for better pricing conditions across all product segments over the next 12 to 18 months, given the more attractive industrywide supply and demand balance. Additionally, not only are rates improving across the board, but we look for policyholder retentions to increase, which should help the expense ratio. We forecast a better loss ratio this year, as it seems unlikely that weather-related catastrophes will continue at an abnormally high level. Also, management has been selectively inking new policies, which should benefit underwriting results, as the quality of its insurance book has improved. Finally, investment income per share should gradually improve, owing to increased cash flow from operations. We also think that investment yields, which have hovered at or near historical lows, will gradually begin to rise.
Travelers is poised to lift earnings at a solid clip over the 3- to 5-year pull. We forecast an improvement in the combined ratio, thanks to management's stringent underwriting standards, along with cost-saving measures. What's more, premiums earned stand to benefit from a better rate environment down the road. We also look for primary insurers, such as Travelers, to retain more of their business moving ahead, rather than cede to reinsurers, which should help lift margins. Travelers will also likely continue to be aggressive on the share buyback front, which lends support to share net. Finally dividend increases appear probable going forward, as the company returns excess capital to shareholders. Such a course would add to this equity's total return appeal.
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. Travelers has approximately 32,000 employees.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.