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Dow 30 Earnings: The Travelers Companies – First Quarter 2011
Property/casualty insurance giant Travelers (TRV – Free Travelers Stock Report) reported some good news on the earnings front for the March period. The insurer posted operating earnings of $1.89 a share (excludes capital gains and losses from the investment portfolio). This compares favorably to our estimate of $1.60 and the year-earlier tally of $1.22 a share. The bottom line benefited from reduced catastrophe losses, a lower share count, and a favorable resolution of prior years' tax concerns.
Net investment income trended 3% higher, year over year, to nearly $780 million before taxes. This reflected, we believe, improved cash flow from operations, coupled with a slight increase in yields on fixed-income securities. What's more, net premiums earned increased moderately relative to 2010's comparable quarter, owing to favorable pricing in some business segments, coupled with improving macroeconomic conditions. The combined ratio (the sum of the loss and expense ratios) improved 170 basis points, to about 94.5%. This implies that the company generated approximately $5.50 in pretax income for every $100 in polices that it insured. The loss ratio was hurt by winter storms that battered parts of the country, though catastrophe exposure (3.4% vs 9.0% last year) was relatively mundane.
As a result of the recent news, we have boosted our 2011 share-net estimate from $6.20 to $6.50, primarily to reflect the better earnings performance. Weather-related events are difficult to predict, of course, though we believe that the current trend of abnormally low catastrophes is not sustainable going forward. However, we believe that management's stringent underwriting standards will result in a profitable combined ratio over the remainder of the year, barring an overage of catastrophes. We think that investment income per share will trend higher as interest rates ultimately increase. What's more, reflecting an improving economic landscape and better supply and demand fundamentals, we look for price increases and elevated policy retentions in some of the company's segments to help lift the top line. The company's balance sheet looks to be in pretty good shape, with reserves to anticipated losses at healthy levels. Thus, we don't look for any significant adverse reserve development (which lowers earnings) over the next year or two.
The Travelers Companies share price increased modestly following the positive first-quarter earnings announcement. Even so, the issue offers worthwhile risk-adjusted total return potential for the pull to 2014-2016. The stock has a good Safety rank of 2 (Above Average), while Price Stability is strong (90 out of a possible 100). The board of directors recently boosted the dividend to an annual rate of $1.64 a share, which should entice those seeking current income. In aggregate, Travelers stock is a solid choice for conservative investors seeking to add some insurance exposure to their overall portfolio.
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. Travelers has approximately 32,000 employees.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.