Property/Casualty insurance giant and member of the Dow-30 Index Travelers (TRV– Free Travelers Stock Report) has reported somewhat mixed second-quarter results. Operating share net, which excludes capital gains and losses from investments, came in at $1.93, which was $0.12 lower than we had anticipated and 9% below the year-earlier tally. TRV stock traded lower on the news.
The primary factor behind the moderate earnings decline was higher-than-expected catastrophes. More specifically, pretax catastrophes were $436 million for the three months ended June 30th, a $96 million increase from 2013's comparable-period tally. What's more, the net favorable impact of reserve releases was $9 million less than last year, at $183 million. Together, these two factors resulted in a combined ratio (the sum of the loss and expense ratios) of 95.1%, which was an 80-basis-point deterioration, year over year. However, the underlying combined ratio (which excludes catastrophes and reserve adjustments) actually improved 0.8%, to 95.1%. We believe this is a better indication of the company's underlying fundamentals, and thus view it as a positive.
Other variables were generally favorable for the June interim. Net premiums earned came in at $5.9 billion for the period, which was slightly above our expectation, and a 5% increase over last year's tally. Travelers benefited from price increases across most product lines, albeit at a more measured clip, coupled with new business wins. Net investment income inched higher, year over year, to $695 million (an $8 million increment), which was no small feat given historically low bond reinvestment yields. We attribute the increase to a higher level of invested assets.
As a result of the recent news, we now look for earnings per share (on an operating basis, which excludes capital gains and losses from investments) of $9.10, which is a $0.20 reduction from our estimate at the time of our mid-June full-page report. We have left our earnings estimates unchanged for next year, at $9.15 a share. We have upped our net premiums earned forecast slightly for 2014 and 2015, to $23.7 billion and $24.5 billion, respectively. Though earnings fell a bit short of our forecast for the June quarter, we believe Travelers should continue to benefit from positive dynamics in the broader insurance market. The recent higher catastrophe level could actually work in the company's favor during next year's policy renewal season, since it ought to give the insurer bargaining power to raise rates to cover the greater loss exposure. What's more, bond reinvestment yields might well inch higher as the Federal Reserve Bank begins to tighten its monetary policy, perhaps as early as late 2014.
Travelers is a solid choice for long-term investors seeking a presence in the P/C insurance market. Capital gains potential is solid at the recent valuation, while an above-average dividend yield (relative to the Value Line median) helps to sweeten the pot. Conservative accounts should also take note of the equity's top score (1; Highest) for Safety.
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.