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Dow-30 Earnings: Travelers Cos. - Fourth Quarter 2013
Property/Casualty insurance behemoth and Dow-30 component Travelers Cos. (TRV - Free Travelers Stock Report) reported record results for the December quarter of last year. Specifically, operating share net, which excludes capital gains and losses from investments, came in at $2.68, which trounced the year-earlier tally of $0.72. The insurer benefited from several positive trends during the period, the most notable being a favorable combined ratio of 87.7%, which was a 17.7% improvement over the previous year's tally. This implies that Travelers generated $12.30 in pretax underwriting profits for every $100 in policies insured. Furthermore, net investment income increased year over year, to $702 million, which is no small feat, given that this line item has been constrained by low bond reinvestment yields. In fact, this may be a point of inflection, as it represented the first positive year-to-year comparison in quite some time. We think this reflects the fairly recent uptick in short-term interest rates.
Net premiums earned also increased mid-single digits relative to 2012's comparable period, as rate increases exceeded cost inflation across all segments, according to management. The Business Insurance unit benefited from a focus on improving profits through an active pricing strategy that resulted in increased written premiums and higher policy retention levels. Furthermore, the Management Liability business continues to post improved results, as price increases have trended above claims in recent months. Finally, improvement in the Auto segment has helped shore up results in the Personal Insurance division.
As a result of the recent top-line momentum, we have boosted our 2014 net premiums earned estimate from $23.375 billion to $23.530 billion. We look for the positive pricing trends to continue, thanks to healthy capacity conditions in the broader P/C insurance market. (Premiums earned came in at about $22.6 billion for full-year 2013.)
We have kept our bottom-line expectation intact for 2014, at $8.15 per share. Though this represents a sizable decrease from 2013's tally of $9.46 a share, we believe this requires a bit more color. Last year, most things were working in the company's favor, particularly a historically low level of industrywide catastrophes, which resulted in a very solid share-net figure. We believe that last year's combined ratio of 89.8% is unsustainable longer term and hence this is the primary reason for our estimate of a year-to-year earnings decline. (Investors should note, though, that increased losses might well give insurers the ability to raise rates during policy renewal season, particularly in those segments affected directly.) Indeed, fundamentals in the wider P/C insurance market should remain solid in our view, and probable modestly higher shorter-term bond yields are certainly a plus.
This blue chip should appeal to conservative investors with a 3- to 5-year investment horizon. The issue offers solid total return potential when adjusted for risk and increases in the dividend should help boost returns on shareholders' equity long term. A continued improvement in the domestic economy, which we forecast, should enable the company to continue to increase rates going forward.
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.