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Dow-30 Earnings: The Travelers Companies - Fourth Quarter 2012
Travelers (TRV - Free Travelers Stock Report), a property/casualty (P/C) insurance company, has reported better-than-expected earnings for the December quarter. And its shares have responded favorably, rising nicely in late-morning trading.
More precisely, earnings from operations, which excludes capital gains and losses from the investment portfolio, came in at $0.72 a share, which was markedly above our initial estimate of $0.21. For the full-year 2012, earnings were $6.21, which was nearly double the year-earlier tally of $3.25 a share. Premiums earned for 2012 came in at $22.357 billion, a slight increase over the year-before figure.
December-quarter results were hurt by Hurricane Sandy, though not to the degree we had thought. Losses related to that devastating storm amounted to $669 million after tax, which was the majority of the $689 million in catastrophe losses for the period. In comparison, in the December quarter of 2011, catastrophe losses were only $68 million, net of taxes. This accounted for a 9.5% deterioration in the combined ratio, year to year, to 105.4%. This implies that Travelers lost $5.40 for every $100 in policies that it insured for the period. All things considered, this wasn't bad at all.
The insurer's other operating fundamentals were fairly solid for the period. Net premiums earned increased slightly from the prior year's level, as the company benefited from more attractive conditions in the P/C insurance market, which resulted in pricing gains across many product lines. What's more, net investment income improved moderately, which is fairly surprising given the current low interest-rate environment, which has constrained bond yields. We believe the increase in this line item was the result of greater cash flow from operations, which resulted in a higher level of invested assets. Finally, the company bought back 5.4 million shares of its stock in the quarter, and 22.4 million for the full year, which helped support bottom-line growth.
We have left our top- and bottom-line expectations intact for 2013. Our premiums forecast is $23.375 billion, which represents a 4.6% increase from 2012's tally, while our share-net estimate, at $6.85, is more than a 10% improvement over 2012. We believe Travelers is well positioned to continue benefiting from improving conditions in the broader P/C insurance industry. Too, increased premium growth should help fuel gains in net investment income, reflecting a higher invested asset base. Share repurchases will likely be part of the equation, as well, though we don't believe the company will be quite as aggressive as it was last year.
Travelers' earnings are poised to increase at a high single-digit annual clip, on average, over the pull to 2015-2017. We look for the combined ratio to remain profitable over that period, barring an overage of catastrophes. Too, investment income should receive a boost down the road, as bond reinvestment yields increase, resulting from likely higher short-term interest rates. Furthermore, the probability of better economic conditions, coupled with improving supply and demand dynamics in the P/C insurance sector, should result in steady gains in premium income over the next 3 to 5 years.
In our view, this stock is a worthwhile 3- to 5-year holding when adjusted for risk (Safety: 1, Highest). Travelers' immense size should continue to help its stock be more stable than many other insurers under our review. (Stock Price Stability: 90 out of 100.)
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.