Property/Casualty insurance giant Travelers (TRV – Free Travelers Stock Report) reported operating share net, which excludes capital gains and losses from investments, of $2.54 during the September quarter, which was above our $2.30 estimate and far higher than the year-earlier tally of $0.91. (Investors should be aware that 2017's results were markedly constrained by significant catastrophes.) The top line (on a net-premiums-earned basis) registered nearly $6.9 billion, which was slightly above our $6.8 billion call.
Looking at it with more granularity, the second quarter was rather unexciting, which isn't a bad thing, particularly given the rather severe weather thus far in 2018. Indeed, two major hurricanes (Florence and Michael) have ravaged the United States, which has resulted in substantial losses. Travelers has thus far made it through relatively unscathed.
The combined ratio was 96.6% during the September interim, which compares favorably to the previous year's 103.2% figure. This return to profitably implies that the insurer posted $3.40 in pretax income for every $100 in policies insured. Given the active hurricane season, this is good news for Travelers.
Net investment income also trended higher, from $588 million to $646 million (an increase of about 9.9%). This doesn't come as much of a surprise to us, given the company's increased cash flow that has resulted in a continued elevated level of invested assets. What's more, bond yields have received a shot in the arm from a string of interest-rate increases by the Federal Reserve. Travelers, as is the case with many insurers, keeps the bulk of its investments in fixed-income securities, due to its conservative bent. We look for reinvestment rates to trend higher in the months ahead, given our outlook for continued rate increases by the central bank.
As a result of the relatively solid performance during the September period, we have raised our top- and bottom-line expectations for full-year 2018. Specifically, we now look for share earnings of $10.15 (a $0.30 increase from our September 7th full-page review), while net premiums earned should top $27.1 billion, a $100 increase from our previous view.
Travelers shares have lost some ground since our September report and now offer worthwhile total-return potential over the 3 to 5 year pull, particularly on a risk-adjusted basis. An above-average dividend yield by Value Line standards 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
