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Dow-30 Earnings: The Travelers Companies - First Quarter 2012
Property/Casualty insurer Travelers (TRV – Free Travelers Stock Report) has reported good first-quarter financial results. Operating income per share (excludes capital gains and losses from the investment portfolio), came in at $2.01. This was a cut above the year-earlier tally of $1.89, and well ahead of our $1.50 estimate. Return on shareholder's equity was 13.1% for the period, which compared quite favorably to many of Travelers' Property/Casualty insurance peers. Investors were pleased with the report, and bid the stock higher on the news.
Net premiums earned were $5.523 billion for the quarter, which marked a 3% increase from the comparable 2011 figure. Price increases were posted across all of Travelers' segments. More precisely, renewal price increases were 8% in Business Insurance during the March quarter. The Financial, Professional, and International insurance segments also experienced increased rates and improved policyholder retentions. What's more, Agency Auto and Homeowners posted gains relative to the prior year.
Another positive factor was the combined ratio (the sum of the loss and expense ratios). This line item was 92.2% during the March period, which was an improvement of 2.5 percentage points from last. This implies that the insurer generated nearly $8 a share in pretax income for every $100 in policies that it underwrote. We believe this improvement is a testament to management's stringent underwriting standards, which have helped margins improve in a strengthening P/C insurance market. Management has been diligent by writing policies that meet its risk/return criterion, rather than undertaking business “at any cost”.
On the other hand, net investment income per share trended downward during the quarter, falling 5% relative to the year-earlier period, despite an increased asset base. This doesn't surprise us much, however, given the current low interest-rate environment, which has resulted in reduced yields on fixed-income investments.
As a result of the recent news, we have increased our full-year 2012 share-net estimate from $5.75 to $6.25, to account for the first-quarter earnings outperformance. In essence, we have left the final three quarters of the year virtually unchanged, though our estimates already represented sizable year-to-year improvements. Net premiums earned should improve modestly this year, thanks to price increases across most product segments in an improving insurance market. We believe that management will be selective in the new business it undertakes, otherwise our top-line growth projection would be greater. We also look for the company's combined ratio to turn positive this year, barring an overage of catastrophes.
Travelers stock remains a decent selection for long-term total return potential, in our view. The company should continue to generate underwriting income over the next 3 to 5 years, assuming a normal level of weather-related catastrophes, on average. Furthermore, investment income will likely improve, as interest rates should gradually increase over that period. The company has also been good about returning excess capital to its stockholders. During the March period, it repurchased six million shares at a cost of about $350 million, while it increased its dividend to an annual rate of $1.84 a share. We look for further increases in both of these initiatives down the road.
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.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.