Property/Casualty insurance behemoth Travelers (TRV Free Travelers Stock Report) reported a decline in year-over-year operating results during the first quarter of 2017. Earnings from operations, which exclude capital gains and losses from investments, clocked in at $2.16 a share, equivalent to a 7.3% decline from the year-before tally. The primary factor behind the decrease was an uptick in the combined ratio from 92.3% to 96.0%. Indeed, catastrophes were $347 million pretax, a noticeable increase from the previous-year tally of $318 million. Thus, 2017 catastrophes accounted for 5.7% of the combined ratio, relative to 5.3% last year.

However, once we dig beneath the surface a bit, results were pretty good on a fundamental basis. The underlying combined ratio (which excludes catastrophes and net favorable prior year reserve development) was 91.7% compared to 90.0% last year. That said, the 170 basis point deterioration was entirely due to net favorable prior reserve development in 2016. This line item can be viewed as ``discretionary'', since management can utilize this benefit virtually at any time. Also, the 91.7% combined ratio implies that Travelers generated $8.30 a share in pretax income for every $100 in policies insured. This compares favorably to historical levels and its P/C insurance peers.

Other variables for the quarter were quite positive. In fact, net premiums earned increased 3.4% year over year, which is no small feat, given increasingly competitive conditions in the broader insurance market. We believe this reflects management's savvy underwriting style, which enables it to effectively price policies with regard to risk undertaken, along with terms & conditions.

What's more, net investment income trended higher (12.1% compared to 2016's first quarter), which is a good sign, given that this line item had been under fire for quite some time reflecting historically low bond reinvestment rates. However, the Federal Reserve has begun raising interest rates, and is likely to continue to do so going forward, which should provide a shot in the arm for insurance companies, since they keep the lion's share of their portfolios in bonds.

We have adjusted our 2017 top- and bottom-line estimates for Travelers, reflecting the first-quarter results. As noted above, our pared expectations largely reflect a higher-than-anticipated level of catastrophes in the first quarter. We now look for net premiums earned of $25.3 billion, a slight decline from our prior forecast of $25.7 billion. Likewise, share net will probably come in around $9.20 this year, a $0.30 reduction from our view at the time of our March 10th report.

We continue to view Travelers as a relatively safe, steady returning investment for subscribers seeking a presence in the P/C insurance industry.

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.