Property/Casualty insurer Travelers, (TRV – Free Travelers Stock Report) posted strong results for the fourth quarter of 2017. Earnings per share on an operating basis (excludes capital gains and losses from investments) clocked in at $2.28, which was markedly above our $2.01 estimate. The tally was, however, sharply below the previous year's $3.20 a share, though that was an extraordinary good quarter where everything seemed to go right for Travelers, which made for a very difficult comparison.
Looking at it with more granularity, the combined ratio came in at 95.5% that was a significant increase from 90% in the fourth quarter of 2016. However, the underlying combined ratio, which excludes catastrophes and other events that are considered out of the ordinary, was relatively stable (92.4% versus 92.0% in the previous-year period). Dissecting it a bit more, catastrophes added 7.5% to the combined ratio in the December quarter of 2017 compared to just 2.2% in the same period of 2016. Catastrophes were $499 million ($324 million aftertax) for the December period.
Net premiums earned advanced 5.6%, year over year, to nearly $6.63 billion. Net written premiums (which can be viewed as a leading indicator for net premiums earned) increased 6% in the quarter, including 5% in the commercial business and 8% in personal insurance. What's more, premium renewals in the Business Insurance segment increased 4%, its best advance in three years.
Net investment income declined slightly, from $627 million to $601 million. This doesn't come as much of a surprise to us, given that bond reinvestment rates are still low relative to historical levels. We look for this line item to increase going forward, however, as measured interest rate increases by the Federal Reserve lend a helping hand to bond yields and thus reinvestment rates.
We have kept intact our share-earnings estimate for this year, at $9.65. This implies a 33% bottom-line advance over last year's tally of $7.27 (which was a 28% decline from the previous year). It should be noted that not only was the fourth quarter of last year difficult on the catastrophe front, but the third period was even harder hit. There were many weather-related occurrences that included a few major hurricanes, along with wildfires in California, which inflicted major damage.
Looking at our current-year forecast in more detail, we expect the top-line to advance at a moderate clip, as Travelers gains new business and likely achieves price increases on its policy renewals. A high catastrophe year, which was the case in 2017, can be a bit of good news during renewal season. This is because it gives insurers the upper hand to raise rates, especially in the product segments and regions directly affected. We don't look for a significant decline in policy retentions, despite likely rate increases, since Travelers offers good value relative to its competition.
Net investment income should also improve, as bond yields benefit from higher interest rates, while net premiums earned advances give Travelers more float (premium proceeds minus immediate expenses). The wild card here is the combined ratio. While it is extremely difficult, if not impossible, to predict the weather longer term, we forecast that industrywide catastrophes will decline this year, on the heels of 2017's abnormally high level.
Travelers remains a safe, long-term holding for those seeking a presence in the P/C Insurance Industry. While current appreciation potential is somewhat limited, its risk profile remains low, while a decent dividend yield adds some 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.
— Alan G. House
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
