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Dow-30 Earnings: The Travelers Companies - Third Quarter 2012
The Travelers Co. (TRV – Free Travelers Stock Report), the property and casualty (P/C) insurance giant and Dow-30 staple, has reported strong earnings for the September quarter. More precisely, earnings from operations, which exclude capital gains and losses from the investment portfolio, came in at $2.22 a share, markedly above our expectation of $1.28 and the year-earlier tally of $0.79. Travelers stock traded nicely higher on the news, reaching a 52-week high in the process.
The September period is generally a down quarter for insurance companies, due to the hurricane season, which typically begins around June 1st and ends November 30th. That stretch usually results in many weather-related catastrophes, which cuts into insurers' earnings. However, things have been relatively tame thus far in 2012. Consequently, Travelers posted a combined ratio (the sum of the expense and loss ratios) of 90.3% in the latest quarter, versus the elevated rate of 104.5% in last year's comparable period. This implies that Travelers made $9.70 in pretax income for every $100 in policies insured.
The underwriting profit was the primary reason for the bottom-line gain in the third quarter. Indeed, net premiums earned increased only slightly compared with last year, while net investment income showed mid-single-digit gains. The latter is promising, however, given the current historically low interest-rate environment. (Insurers keep the lion's share of their portfolio in bonds, which are highly correlated to interest rates.) We believe the advance in this line item was owing to an increased invested asset base. What's more, the company bought back 5.4 million units of TRV stock for a combined $350 million, which helped support bottom-line growth.
Travelers registered rate gains across all of its business segments in the September quarter. The Business Insurance unit experienced a nice advance in rates, thanks to the success of its data and analytics tools. What's more, the combined ratio showed progress in this segment. The Management Liability unit helped to drive mid-single-digit renewal rate increases in the Financial, Professional, and International division. Furthermore, the Personal Insurance segment enjoyed price increases and more favorable terms and conditions, particularly within the Agency Homeowners unit.
As a result of the recent earnings outperformance, we have raised our share-net view for the current year from $6.15 to $7.10. We've added a penny to our December-period estimate, to $1.61, while leaving our full-year 2013 target intact at $6.40 a share. Travelers underlying fundamentals remain strong, thanks to favorable capacity conditions in the broader P/C insurance industry, coupled with management's solid underwriting discipline. However, we believe this year's September quarter will be very tough to match, and this is reflected in our expectation of a year-over-year share-net decline for 2013.
Travelers stock has advanced by a double-digit percentage since our mid-September full-page review. Nevertheless, given its solid dividend yield and Highest (1) Safety rank, these shares are still an attractive choice for conservative investors seeking a P/C insurance holding. The company's solid balance sheet and large size are pluses.
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.