Property/Casualty insurer Travelers (TRV – Free Travelers Stock Report) reported decent results for the September quarter, given the challenges currently facing the P/C insurance market. This year has been one of the most severe hurricane seasons (June 1st through November 30th) on the domestic front in quite some time. Indeed, Texas, Florida, and Puerto Rico were ravaged by Hurricanes Harvey, Irma, and Maria, respectively, resulting in billions of dollars of insured damages. This was after several years of subdued hurricane seasons.
Looking at it with more granularity, Traveler's bottom line clocked in at $0.91 on an operating basis (excludes capital gains and losses from investments) during the September interim. However, this number was a far cry from our $2.06 estimate (which was made in early September, before Irma and Maria made landfall in the U.S. and the full effects from Harvey were known). Wall Street's consensus estimates were $0.43 a share after factoring in the hurricanes' impact. Thus, Travelers did a pretty good job of navigating through a difficult quarter.
The company's combined ratio was 103.2% during the period, which includes a whopping 10.7% from catastrophe-related losses. The underlying combined ratio, which excludes catastrophes, remained strong, at 92.8%, which is a testament to management's underwriting philosophy.
Net investment income was decent, dialing in at $588 million, a modest advance from the previous year tally. We attribute this to higher private equity returns. This is no small feat, given low reinvestment rates on fixed income securities. Bond yields have hovered at historically low levels for quite some time, resulting from the current low interest-rate environment. However, the Federal Reserve has begun raising rates, which could be a shot in the arm for bond yields moving forward.
As a result of the recent news, we have lowered our 2017 top- and bottom-line expectations from $25.4 billion and $8.90 a share, to $25.7 billion and $7.60, respectively. This largely reflects the lower-than-expected September-quarter results. We have reduced our December-period tally by $0.15 a share, as it appears that some claims activity resulting from the hurricanes may spill over into that quarter.
The September quarter notwithstanding, we believe Travelers' size and strong management place it a cut above most others in the insurance industry. As noted, the underperformance in the September quarter largely reflects an unusually high level of claims activity resulting from 2017's severe hurricane season. Indeed, absent these events, Travelers' underlying business fundamentals remain strong. In fact, we believe the company may enjoy healthy rate increases during next year's policy renewal season, as the aforementioned hurricanes provide leverage.
Travelers stock hasn't moved much following the third-quarter earnings announcement, as the market appears to have factored in the effects from the hurricanes. We continue to like the Travelers story long term, though these shares have increased at a mid-single-digit clip since our September full-page report, discounting a portion of their long-term gains potential.
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 G. House
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
