Property/Casualty insurance giant Travelers (TRV- Free Travelers Stock Report) reported strong results for the first quarter of this year. Operating share net, which excludes capital gains and losses from investments, came in at $2.95, which was markedly above both the year-before tally and our expectations. The primary factor behind the stellar performance was a very profitable combined ratio of 85.7%, which was a 280-basis-point improvement from last year's tally. This implies that Travelers made $14.30 in pretax income from every $100 in policies that it underwrote. Though catastrophes (single events that cause more than $25 million in insured losses) increased from 1.8% to 2.6% of aggregate losses, that figure remains low on a relative basis. Furthermore, the company benefited from a 5.1% favorable impact from reserve releases during the period, which was a 1% advance from 2013's comparable-period tally.
Net premiums earned climbed at a mid-single-digit clip as rate increases outdistanced cost inflation across all product lines. Too, net investment income advanced nearly 10%, year over year, thanks to solid returns at the nonfixed income segment of the portfolio. This is noteworthy because this line item had been pressured for quite some time by historically low interest rates.
The Business Insurance unit enjoyed record net premiums written for the quarter, thanks to continued improvement in policy-renewal rates. What's more, retention rates remained strong, despite the uptick in pricing, which augurs well for the long term.
The Financial, Professional & International division boasted a 47% increase in net written premiums, as a result of a higher top line at both the Bond & Financial Products and International segments. Policyholder retention rates and pricing on renewals remain solid at these units, as well.
Meanwhile, though the top line fell at a mid-single-digit rate at the Personal Insurance segment, there were some positive trends. Specifically, pricing on policy renewals continued to improve, while retention rates remained strong, which is consistent with recent quarterly trends. New business wins received a boost from the company's new auto product, Quantum 2.0.
The company's solid results have been a positive for holders of TRV stock. Specifically, the return on shareholders' equity in the March period increased 2.7% from last year, to 16.8%. What's more, the board of directors boosted the quarterly dividend by a nickel a share, to $0.55, beginning with the June 30th payout.
As a result of the strong showing for the March interim, we have increased our view for the current year. We now look for operating earnings to come in at $9.10 a share, which is a $0.80 lift from our prior estimate. The lion's share of this increase was the result of the strong first-quarter showing. It should be noted that our view for the current year represents a moderate reduction from last year's tally. This is because 2013 (and the March quarter for that matter) were periods of significantly low catastrophes. Hence, we feel this is unsustainable longer term, and we forecast an uptick in the loss ratio for full-year 2014. Otherwise, comparisons appear quite promising. Net premiums earned should get a boost from price increases on renewals, while retention rates are poised to remain at attractive levels. Too, net investment income should trend higher, thanks to an increased level of invested assets, coupled with higher reinvestment rates on bonds.
Travelers stock offers solid total return potential for the pull to 2017-2019, particularly when adjusted for risk. An increasing payout also helps to sweeten the pot.
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.