Property/Casualty Insurance behemoth Travelers (TRV – Free Travelers Stock Report) turned in relatively lackluster results during the September quarter, and its share price has responded in kind. Looking at it with more granularity, operating earnings per share, which exclude capital gains and losses from investments, dialed in at $1.43, which was a marked decrease from the previous-year tally and our initial estimate of $2.45.
What caused the relative outperformance? What stands out is a steep increase in the combined ratio, which is bad news for insurers. On point, this item checked in at 101.5%, which was a nearly 5% increase over the previous-year figure. The primary reason for this increase was an increasingly challenging tort environment. (A tort is a wrongful act or infringement of a right (other than a contract) that leads to civil legal liability.) We view this as somewhat of a ``nonrecurring event'', though it is included as part of Traveler's operations. The underlying ratio, which excludes events deemed to be outside of the normal course of business, was 94.1%, which was only a slight increase over last year's 93.0% figure.
Hence, we believe that Travelers core fundamentals remain in pretty good shape. Net premiums earned advanced 4.3% during the June quarter, thanks to business wins and renewal rate increases. Specifically, price increases at the Business Insurance division were a strong 7.4%, the highest increase in five years. One item that bears watching is net investment income. This figure decreased moderately (from $646 million to $622 million) during the June interim. While not earth-shattering, this may be a harbinger of things to come. Though invested assets ought to increase going forward, thanks to strong gains in premiums earned, reinvestment yields on bonds will likely be constrained by the Federal Reserve's interest-rate easing measures.
We now look for Travelers to earn $9.30 a share this year, on premiums earned of nearly $28.2 billion. Though our top-line forecast was inched up, the bottom-line projection is a sharp decline from our previous call of $10.70. However, the lion's share of the decrease reflects the subpar third-quarter showing. Worth noting, the board of directors increased the quarterly dividend by 6.5%, to $0.82 a share in the June quarter.
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
