Property/Casualty Insurer Travelers (TRV – Free Travelers Stock Report) reported first-quarter results that were slightly below our expectations. Looking at it with more granularity, operating earnings per share, which excludes capital gains and losses, clocked in at $2.42, which was a 12% advance over the previous-year tally, though $0.08 below our estimate. The insurer's combined ratio was 95.5% during the interim, a 50-basis-point improvement from last year's figure. This implies that the company generated $4.50 in pretax income for every $100 in policies underwritten. Dissecting the combined ratio further, catastrophes added 5.4% to the figure (compared to 5.6% last year), while reserve-strengthening charges added 2.3% (1.3% increase last year). This resulted in an underlying combined ratio of 92.4%, a 70-basis-point uptick from 2017's comparable quarter.
Net premiums earned increased 5.7% to more than $6.5 billion. The top line benefited from the Business Insurance segment, which saw the largest rise in renewal premiums in three years. Net investment income, meanwhile, decreased slightly, year over year, from $610 million to $603 million. Private equity returns remained strong but were lower than the previous-year tally, while income from the fixed income portion of the portfolio benefited from increased interest rates. Insurers keep the lion's share of their portfolios in bonds, given their conservative nature. However, exposure to limited partnerships, while lifting overall risk a tad, provides for above-average total return potential.
As a result of the recent news, we have pared our 2018 share-earnings call slightly, from $10.75 to $10.65. This reflects the modest underperformance (relative to our expectations) for the March quarter. Traveler's fundamentals remain largely positive. Net premiums earned are likely to climb at a moderate rate this year, driven by new business wins and price increases across most product lines. Last year, it should be noted, was particularly difficult on the catastrophe front, with hurricanes and wildfires causing significant damage. Hence, this has given insurers such as Travelers the upper hand during policy renewal season. We also look for Travelers to retain a significant portion of its business, which helps to cut costs and boost the top line. What's more, net investment income ought to trend higher as well, thanks to better bond reinvestment rates fueled by interest-rate increases by the Federal Reserve. Finally, we forecast an improvement in the combined ratio this year, as last year's abnormally high level of catastrophes are unlikely to be replicated. Of course, anything can happen, as the weather is difficult to predict longer term.
Travelers remains a solid choice for conservative investors seeking an insurance holding to round out their otherwise diversified portfolio. The stock boasts our Highest (1) rank for safety, while a moderate dividend yield provides a steady stream of income. The company's immense size and healthy balance sheet give it a leg up during renewal season and enable it to withstand industry downturns better than most.
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.
— Alan G. House
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
