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Dow 30 Earnings: The Travelers Companies - Third Quarter 2011
Property/Casualty insurance behemoth The Travelers Companies (TRV – Free Travelers Stock Report), has reported third-quarter earnings that were below our expectations and the year-earlier tally. Although the news doesn't appear to be encouraging at first glance, deeper analysis reveals that the company's underlying fundamentals remain relatively intact. The market seemed to reach the same conclusion, driving the stock price solidly higher in morning trading.
Travelers posted operating share net (excludes capital gains and losses from the investment portfolio) of $0.79, which compares unfavorably with our $1.35 estimate and the prior-year figure of $1.81. However, this requires an explanation. The third quarter was significantly hurt by a large number of catastrophe-related claims, primarily due to Hurricane Irene and Tropical Storm Lee. These events resulted in a $489 million increase in pretax catastrophe losses, which added 8.6% to the combined ratio for the interim. The combined ratio (the sum of the loss and expense ratios) was 104.5% for the period, a nearly 14% deterioration from last year's comparable tally. This implies that the company lost money (4.5%) on its earned premiums during the quarter. However, this doesn't come as a surprise to us, given the large number of catastrophes during the interim.
As a result of the recent news, we have reduced our share-earnings expectation for this year, from $4.00 to $3.40. Although we have shaved a few cents from our December-quarter estimate, the lion's share of the decrease was due to the third period's storm activity. Indeed, the company's fundamentals remain in pretty good shape. Net premiums earned roughly matched our estimate in the September quarter, as new business wins and pricing gains in some product segments helped to shore up results. What's more, although net investment income declined 6% from last year, this isn't bad, considering that yields on fixed-income securities are near all-time lows and the broader economy is quite uneven, albeit, on the whole, grudgingly moving forward. Reserves to estimated losses appear to be in pretty good shape, too, which augurs well for the future. This should result in more favorable prior-year reserve development (which adds to earnings) and less chance of reserve strengthening (cuts into profits).
Travelers remains a solid company for the 3- to 5-year pull, in our opinion. Its immense size gives it the wherewithal to bargain with its customers to achieve favorable terms & conditions and pricing gains when the operating climate warrants. Travelers doesn't have to write business "at any cost'" just to win new customers. Instead it can focus on selectively boosting margins, and can offer prices and other terms that may be better than the competitions' due to its considerable size. We believe this will benefit the industry giant considerably once the economy improves and conditions perk up in the cyclical P/C insurance market.
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.