Property/Casualty insurance giant Travelers (TRV – Free Travelers Stock Report) reported operating earnings per share (excluded capital gains and losses from the investment portfolio) of $2.02. This compares favorably to the year-ago figure of $1.81 a share, but fell short of our $2.47 expectation.
Looking at it with more granularity, net premiums earned advanced 4.4%, to just shy of $7 billion. This was also a favorable comparison relative to last year's nearly $6.7 billion top-line figure, but again fell shy of our $7.4 billion expectation. Meanwhile, the combined ratio climbed from 98.1% to 98.4%, as weather-related catastrophes ticked higher. This figure inched closer to the all-important breakeven point for P/C insurers (100%). While we believe that Travelers insurance book is high-quality in nature, weather-related catastrophes and other noncatastrophe claims (events that result in less than $25 million in insured losses), have been higher than normal in recent weeks.
Net investment income trended nearly 9% higher, to $648 million, on a year-over-year basis during the June interim. This doesn't come as much of a surprise to us, given the insurer's increased invested asset base, coupled with elevated bond reinvestment rates. The latter has been due to several interest-rate increases by the Federal Reserve over the past couple of years.
In a nutshell, while second-quarter results weren't earth shattering at first blush, they were favorable compared to last year's comparable quarter. Though results didn't quite live up to our expectations, we believe it was largely due to broader factors that were largely out of Travelers' control.
We have reduced our top- and bottom-line expectations for full-year 2019. We now look for net premiums earned of $28.1 billion, compared to our previous $28.8 billion estimate. Also, share earnings are expected to be $10.30, a $0.90 reduction from the time of our June 7th full-page report.
We are slightly less optimistic regarding the back half of the year. Though weather-related catastrophes are difficult to predict, it seems that the trend is for increased occurrences, which we are factoring into our earnings model. Regarding the top line, our less optimistic view largely reflects intense industry competition coupled with management's stringent underwriting standards. Travelers doesn't underwrite insurance at any cost. Instead it covers only those policies that meet its strict criterion. While this may hinder top-line growth at times, it generally results in better margins over the long pull. We are also optimistic that net investment income will continue to trend favorably over the back half of the year. While the Fed has seemingly let up on the throttle regarding interest-rate hikes over the past several months, fixed-income reinvestment rates remain favorable on a year-over-year basis.
Travelers remains a solid selection for conservative accounts seeking a presence in the P/C insurance industry. It's Highest (1) Safety score should provide some comfort to risk-averse investors, while a decent 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
