Property/Casualty insurance behemoth Travelers Companies (TRV - Free Travelers Companies Stock Report) has reported somewhat mixed results for the second quarter. On the bright side, net premiums earned increased 4.7% from the year-earlier period, to just over $6.35 billion. However, earnings from operations, which excludes capital gains and losses from investments, were $1.92 a share, well below the previous-year tally of $2.20 and our $2.16 estimate. We will look at the company's fundamentals with more granularity in the paragraphs below.
The main factor behind the relative underperformance for the June quarter was the combined ratio. This fundamental was 96.7% for the period, a 360 basis point increase (negative factor for profits) from last year's tally. Second-quarter results were constrained by an above-average level of storm activity, which resulted in elevated claims relative to historical averages. However, the underlying combined ratio, which excludes variables such as catastrophes, reserve additions or subtractions, among other items, was relatively unchanged compared to 2016 (93.5% this year versus 92.3%). Thus, although Travelers insurance operations were less profitable, when you dig beneath the surface, underlying fundamentals were quite healthy.
Another line item that has received special attention in recent months is investment income. Many insurers have seen their investment returns constrained over the past several quarters by historically low bond reinvestment rates. However, Travelers bucked the trend during the June period, as investment income advanced 6% after tax, reflecting strong private-equity returns. Though Travelers keeps a significant portion of its investment portfolio in bonds, its equity and private-equity component add a level of diversity, albeit with a slightly higher risk profile. We look for bond reinvestment yields to trend higher going forward, as the Federal Reserve gradually increases short-term interest rates. This ought to eventually provide a shot in the arm to Traveler's investment portfolio.
As a result of the recent news, we have boosted our top-line estimates, while paring our earnings expectations for the current year. We now look for net premiums earned of nearly $25.4 billion, a slight uptick from our prior call of just over $25.3 billion. Our new expectation represents a year-over-year increase of about 3.5%. Although competitive conditions remain intense in the broader P/C insurance industry, Travelers immense size, savvy management, and focus on underlying profitability (through stringent underwriting standards), give it a leg up on its industry peers.
Meantime, we have lowered our 2017 earnings estimate from $9.25 to $9.00. This revision solely reflects the earnings miss during the June quarter, as we have left roughly intact our projections for the back half of the year.
Travelers remains a solid long-term choice for investors seeking an insurance holding to round out their portfolios. The dividend slightly exceeds the Value Line median, while the stock's Beta and Price Stability scores suggest less-than-average volatility.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
