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Dow 30 Earnings: The Travelers Companies – Second Quarter 2011
The Travelers Companies (TRV – Free Travelers Stock Report), the property/casualty insurance giant, had one of its most difficult quarters in recent memory during the June period. The company suffered a loss of $0.91 in the term, compared with a profit of $1.39 in the year-earlier period, as unprecedented tornado activity in the months of April and May wreaked havoc on results.
Net premiums earned actually advanced 3% in the second quarter, from the prior year, to $5.5 billion, reflecting better rates across all three business segments and a slightly more positive economic environment. In particular, TRV's workers' compensation and diversified commercial insurance units both performed rather well, thanks to pricing gains since last year.
However, catastrophe-related losses jumped nearly fourfold year to year, to roughly $1.7 billion, due to severe tornadoes and hail storms primarily in the Midwest and Southeast regions of the United States. In fact, management stated that the losses TRV absorbed in the latest quarter were much larger than those incurred during 2005's Hurricane Katrina, a seminal moment for the Insurance industry. The human toll was also considerable, including a significant loss of life.
As a result, the combined ratio (the sum of the loss and expense ratios) took a substantial turn for the worse in the June interim, increasing from 95.2% to 125.0%. Furthermore, Travelers' typically stalwart underwriting performance also took some lumps, swinging from a gain of $210 million in the 2010 comparable period to a loss of $652 million.
As such, we've lowered our full-year 2011 earnings estimate from $6.50 a share to $4.05, entirely due to the steep loss suffered in the second quarter. The news isn't all bad for the insurer, and we expect results to approach more-normal levels in the back half of the year. Too, the company's net premiums earned are on pace for a modest improvement, and its investment income will likely increase as bond yields ultimately trend higher.
Looking ahead, our bottom-line forecast for 2012 stands at $6.75 a share, which would mark a 60%-plus advance from our depressed 2011 estimate. With its near-term results under pressure, Travelers’ share price is down about 6% since our full-page June report, and declined modestly following this latest announcement. It's worth noting, however, that the stock's recent pullback has added to its appreciation potential to 2014-2016, since we expect Travelers' operating performance to get back on track over the next several years. And, despite its current difficulties, the blue chip should appeal to conservative accounts with a long-term view, owing to its above average Safety rank (2) and decent dividend yield.
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.