Property/Casualty insurance behemoth Travelers (TRV – Free Travelers Stock Report) missed our mark during the fourth quarter of last year. Looking at it with more granularity, the company earned $2.13 per share on an operating basis (excludes capital gains and losses from the investment portfolio), which compares unfavorably to our estimate of $3.34 and the year-before tally of $2.28. We believe the lion's share of the relative underperformance stemmed from an above average level of catastrophes, notably the California wildfires and Hurricane Michael. Indeed, catastrophe losses dialed in at $610 million during the December interim, representing an increase of 22.2% from the previous-year figure. This resulted in a combined ratio of 97.5%, which compares unfavorably to 2017's like-period tally of 95.5%. Though the underwriting margin deteriorated by two percentage points, Travelers' insurance book was still in the black, generating $2.50 in pretax income for every $100 in policies insured.
Other fundamentals were relatively strong compared to 2017's comparable period. On point, net premiums earned came in at $6.945 billion, representing a 4.8% advance, year over year. We believe management's savvy underwriting ability has enabled it to renew business at attractive rates, while adding new policies that meet its stringent risk/return criterion. Furthermore, net investment income increased 4.8%, to $630 million. This isn't a surprise to us, given increasingly higher bond reinvestment rates, thanks to several interest-rate increases by the Federal Reserve.
In aggregate, the company's full-year operating earnings clocked in at $8.94, representing a year-over-year advance of nearly 23%. Net premiums earned gains were also healthy, increasing 5.4%, to just north of $6.9 billion.
We have left intact our top- and bottom-line expectations for next year. We look for earnings per share of $11.35 on premiums earned of approximately $28.2 billion. Dynamics remain generally strong in the P/C insurance sector, and we believe a relatively harsh catastrophe year in 2018 might well help keep the momentum going. Catastrophes can be a bit of a double-edged sword for insurers. On one hand they result in a hit to the bottom line as claims are paid out. However, they also give issuers the upper hand during policy renewal season. We also believe Travelers will receive a lift again next year from higher bond yields, which should provide a shot in the arm for net investment income per share. Our forecast is based on a more normalized level of catastrophes in 2019, which, of course, is difficult to predict.
Travelers remains a solid choice for conservative investors with a 3- to 5-year investment horizon. Capital gains potential over that span exceeds the Value Line average by a good amount, while a healthy dividend helps to sweeten the pot. The company's immense size and financial strength give it a leg up on the competition, from our perspective, especially during more-difficult times.
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
