Travelers’ Stock Drops As Q1 Profits Fall 21%
The Travelers Companies (NYSE:TRV) reported its earnings for the first quarter of 2015 on Tuesday, missing market estimates. As a result the company’s stock fell by over 4%, hitting its lowest level in three months. The company reported a 21% year-over-year dip in net income of $833 million for the quarter. The primary reasons behind this steep fall were relatively poor underwriting performance and a huge decline in investment income. [1] The overall combined ratio – the ratio of claims to premiums – increased from 85.7% in the first quarter of 2014 to 88.9% in 2015. This was due to an increase in catastrophe-related losses coming from severe winter conditions in the eastern U.S., and the drought in the western part of the country, as well as lower net favorable prior year reserve development. The revenues also declined by 1% y-o-y to roughly $6.6 billion during the first quarter. [2]
During the first quarter, Travelers returned about $850 million to its shareholders in the form of share repurchases and dividends. Below we discuss the performance of Travelers’ different divisions during the period. We have a price estimate of $113 for Travelers’ stock, which is about 10% higher than the current market price.
See Full Analysis for Travelers Here
Business And International Insurance
Business insurance, which includes worker’s compensation, commercial automobile and general liability products, is the most valuable division for the company. It accounts for nearly two-thirds of the company’s total revenues. Net premiums earned increased by just 1% y-o-y, as there was marginal growth across different lines in the business and international insurance division. [3] Operating income for the division fell by about 25% y-o-y as net investment income in this division declined by over 20% during the same period. The combined ratio increased from 89.2% in Q1 2014 to 93.3% in Q1 2015 as catastrophe related losses rose.
However, international operations witnessed a 7% y-o-y decline in net premiums, adversely impacted by foreign currency headwinds. Outside the U.S. the company has a significant presence in Canada, Ireland, the U.K. and Brazil, and accounts for about 15% of the total premiums written in the division. Last week, Travelers announced its plan to acquire a 95% stake in the property and casualty insurance business of J. Malucelli Participações em Seguros e Resseguros S.A. (J. Malucelli). [4]
Personal Insurance
The company offers homeowners’ multiperil and personal automobile insurance products within this division. Total premiums earned from the division remained unchanged at about $1.7 billion during the first quarter of 2015. Operating income declined by 6% y-o-y to $252 million. This was primarily due to an 18% y-o-y decline in investment income within the division. The combined ratio remained largely unchanged at 83.5%.
The personal automobile insurance line added 21,000 new policies during the quarter on the back of strong performance from Quantum Auto 2.0. The combined ratio at 90.2% benefited from favorable prior year reserve development. Net written premiums rose by over 4% y-o-y to $822 million during the quarter.
Decline In Investment Income
Insurance companies invest a portion of their earned premiums in different investment instruments such as fixed income securities, government and corporate bonds, equities, oil and real estate assets. During the first quarter, an 18% decline in the company’s net investment income added to the company’s woes. This was driven by several factors: non-fixed income investments, which include energy-related investments, reported an after-tax loss of $21 million during the quarter. [5] A huge slump in oil prices was a crucial factor in this decline. Fixed income instruments also continued to generate lower returns due to the low interest rate environment.
Notes:- Travelers Reports Quarterly Net and Operating Income of $833 Million and $827 Million, Respectively, and Net and Operating Income per Diluted Share of $2.55 and $2.53, Respectively, Travelers Press Release [↩]
- SEC 10-Q Filing [↩]
- SEC 8-K Filing [↩]
- Travelers to Acquire Majority Interest in Property Casualty Business of its J. Malucelli Joint Venture in Brazil, Travelers Press Release [↩]
- The Travelers Companies’ CEO Jay Fishman on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha [↩]