Property/Casualty insurer Travelers (TRV – Free Travelers Stock Report) reported solid results for the December period. However, its share price has slipped moderately in trading this morning, along with the broader market averages. Travelers’ shares have performed quite well in recent weeks, and thus it may have been due for a haircut.
Looking at it with more granularity, earnings from operations, which exclude capital gains and losses from investments, clocked in at $3.32 a share in the December period, which was a dime higher than our expectation and a whopping 56% higher than the previous-year period.
The combined ratio improved 5.1%, to 92.4%, year over year. This implies that the company generated $7.60 in pretax profits for every $100 in policies insured. Travelers benefited from lower catastrophe losses (7.7% positive impact to the combined ratio), along with favorable reserve development that aided the combined ratio by 1.6%. The expense ratio (one of the two factors of the combined ratio, along with the loss ratio) dialed in at 29.6% for the full year, thanks to a strong 29.1% figure for the December period. While a slight deterioration from 2018's very strong figure, it was far better than the recent historical average. What's more, the top line, as measured by net premiums earned, came in at $7.25 billion, which was slightly above our initial call and 4.4% above the previous-year number. The company benefited from renewal price increases of 7.8% at its Business Insurance unit, the best improvement since 2013.
On the other hand, net investment income declined slightly on a year-over-year basis (about 2.3%). We attribute this to reduced bond reinvestment rates, as the Federal Reserve has lowered interest rates over the past year. Though net investment income trends might well continue to be constrained by reduced bond yields, increasing invested assets ought to help soften the blow.
All told, Travelers registered full-year net premiums earned of $28.3 billion, resulting in share net of $9.60. The latter represents year-over-year growth of about 7.4%. We have left our top- and bottom-line expectations intact for 2020, with premiums earned of $30 billion and share earnings of $10.75. Broader conditions continue to be quite promising in the P/C Insurance sector. Pricing gains continue to be healthy, retention rates remain at or above the historical averages, while loss trends have generally been favorable.
This Dow Component remains a solid risk-adjusted choice for conservative investors seeking an insurance holding to round out their otherwise diversified portfolios. A solid dividend helps to sweeten the pot.
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 House
