Property/Casualty insurance behemoth Travelers (TRV – Free Travelers Stock Report) reported somewhat disappointing results for the June quarter. On point, operating share net, which excludes capital gains and losses from the investment portfolio, clocked in at $1.81, which was below the previous year's $1.92 tally and markedly lower than our $2.75 estimate.
Looking at it with a bit more granularity, the bottom line was constrained by a 1.4% increase in the combined ratio, to 98.1%. Though this implies underwriting profitability, the figure was significantly below our expectation. Catastrophes, net of reinsurance, added 7.3% to the combined ratio, compared to just 6.4% in last year's comparable period. (Catastrophe losses were $488 million for the June quarter, which is about $50 more than management expected though within the normal range.) Net favorable loss reserve (a plus for the income statement) was also less than the previous year, decreasing the combined ratio by only 2.8% relative to 3.2% in 2017.
Other line items were generally on par with our expectations. Net premiums earned were nearly $6.7 billion, a tad shy of our $6.76 billion estimate, though 5.4% above the previous-year tally. This doesn't come as much of a surprise to us, given that pricing conditions in the broader insurance market have been quite strong, reflecting a severe hurricane season last year. It should be noted that significant losses generally given insurers the upper hand during policy renewal season.
What's more, net investment income came in roughly flat at $595 million. This line item has benefited from higher interest rates in recent times, thanks to the Federal Reserve's tightening measures.
We have reduced our top- and bottom-line expectations to reflect the relative underperformance during the June interim. We now look for net premiums earned of about $27 billion, compared to our prior call of just shy of $27.3 billion. Share earnings ought to be in the neighborhood of $9.70, a $0.95 decrease from our prior estimate of $10.65. However, we have left intact our forecast for the back half of the year. We feel that results during the June period were constrained by an above normal level of catastrophes, and, hence, weren't company specific. Travelers underlying fundamentals remain strong, buoyed by higher interest rates and price increases across many product lines.
Travelers stock declined moderately following the June-quarter earnings release. We believe these shares continue to be a solid choice for conservative investors seeking a presence in the P/C insurance industry. They offer decent 3- to 5-year gains potential, particularly when adjusted for risk. An above average dividend yield also 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
