On Thursday, January 23, 2020, property & casualty insurance giant The Travelers Cos., Inc. (TRV) announced its fourth quarter 2019 earnings results. At first glance, these results were somewhat mixed as the company failed to beat the expectations of analysts in terms of net earned premiums (similar to revenues), but it did beat their earnings expectations. The market seemed to like these numbers, though, and pushed the company’s share price up in pre-market trading. A closer look at the company’s results meanwhile does indeed show that there were a number of things for investors to like here as most financial metrics showed improvement compared to both the previous quarter as well as the same quarter of last year. The company’s full-year numbers also generally showed improvement compared to 2018, which is nice to see. Overall then, investors should generally be pleased with these results and Travelers continues to show why it is a top-notch pick in the insurance industry.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Travelers’ fourth quarter 2019 earnings results:
- Travelers reported total revenues of $8.063 billion in the fourth quarter of 2019. This represents a 3.42% increase over the $7.796 billion that the company brought in during the same quarter of last year.
- The company had total catastrophe losses of $85 million during the most recent quarter. This is significantly better than the $610 million that the company had during the prior-year quarter.
- Travelers achieved a combined ratio of 92.4% during the quarter. This is much better than the 97.5% that the company reported during the year-ago quarter.
- The company had a book value per share of $101.55 as of December 31, 2019. This is a very significant 16.94% increase over the $86.84 per share that the company had at the end of 2018.
- The Travelers Companies reported a net income of $873 million in the fourth quarter of 2019. This represents a 40.58% increase over the $621 million that the company reported in the fourth quarter of 2018.
It seems likely that the first thing that any reader reviewing these results is likely to notice is that essentially every measure of financial performance improved compared to the prior-year quarter. There were a few reasons for this but one of the major ones is that the company’s revenues increased over the period. There are two main components to revenues for an insurance company. The first of these is net written premiums, which is the money (premiums) that the company collects from its policyholders (customers) in exchange for providing them with insurance protection. The second component of revenues is the money that the company brings in off of its investment portfolio, which we will discuss later in this article. In this case, Travelers enjoyed significantly higher net written premiums, $7.075 billion compared to $6.691 billion, year over year that was driven by higher premium revenue across all of its business lines. This is a very positive sign as it not only shows us that the company’s customers were broadly willing to pay more money for insurance but also that it was able to attract more customers to its platform by virtue of its financial strength.
By far, the largest individual component of Travelers’ franchise is its business insurance unit. In fact, Travelers is generally considered to be a business insurer, and while it has certainly made its mark in the market for personal insurance, the company’s business insurance unit is still the largest that it possesses. Fortunately, this unit saw reasonably strong year-over-year growth. In the fourth quarter of 2019, the company’s business insurance unit reported total net written premiums of $3.703 billion, a 4.81% increase over the $3.533 billion that it had in the year-ago quarter, which also represents 52.34% of the company’s total net written premium. Clearly then, we can see that the business insurance unit does account for the lion’s share of the company’s business. The company credits this improvement to high retention of existing customers and improved success at attracting new business, which speaks well to the confidence that its customers have in its financial strength. This conclusion is reinforced by the fact that Travelers was able to increase the prices on its policies without losing customers, which also had a positive impact on net written premium.
Travelers also saw relatively strong growth in the net written premiums of its bond and specialty product business unit. This unit is not what most people typically think of when they think of an insurance company, but it is a vital part of the American economy because these products essentially guarantee that one party to a contract will not take a loss if the other party fails to perform. It is admittedly a relatively small portion of Travelers’ overall business, though, as it only accounted for $714 million worth of net written premiums in the fourth quarter 2019, representing 10.09% of the company’s total. This is a very significant 8.68% increase over the $657 million that the company reported in the prior-year quarter. Travelers largely credits this overall improvement to the same factors that it credits the year-over-year improvement in business insurance to, although it does specifically state that its management liability business saw a great deal of new business.
The company’s personal insurance business has become an increasingly major force in the insurance industry, although it still only accounts for the minority of Travelers’ franchise. This business unit also delivered growth in the year-over-year period. In the fourth quarter of 2019, Travelers’ personal insurance business had net written premiums of $2.658 billion, which represents a 6.28% increase over the $2.501 billion that the unit reported in the year-ago period. The overwhelming majority of this came from the homeowners’ product, which delivered a 13% year-over-year increase in net written premium. The company cites many of the same factors responsible for the improvement in its business insurance lines for the improvement here. In short, Travelers notes that it had a much easier time getting renewals from its customers and was still able to increase the prices for these products without losing these customers. This speaks well to the quality of the business itself and the overall satisfaction that its customers have with the company’s products.
One of the most important metrics for us to look at when evaluating the performance of an insurance company is the combined ratio. The combined ratio tells us the percentage of premiums that it collects from its customers that are needed to cover the claims against the company under its policies. As such, the lower this ratio the better as that means that the company generates more underwriting profits and gets to keep more of the premiums that it collects. Occasionally, we see this ratio over 100%, which is an indication that the company is underpricing its policies and is relying on profits from its investment portfolio to make up the difference. This is a very aggressive strategy that can be used to grab market share, but it is not the kind of thing that I like to see from an insurance company as that is the type of firm that should be managed conservatively. Travelers does not generally use that strategy and it certainly did not in the fourth quarter of this year, which was very nice to see. As noted in the highlights, Travelers achieved a combined ratio of 92.4%, which is lower than the 97.5% that it had in the year-ago quarter. This is a clear sign of improvement and the company’s underwriting profits did reflect this improvement. This increase in underwriting profits means that the company was able to add more money to its reserves than it did during the year-ago period, which means that Travelers now has more money to invest. This is something that is always nice to see.
There are two main reasons for the increase in underwriting profits. One of them is the aforementioned price increases that the company was able to achieve across all of its lines of business. It should be fairly obvious why this would result in higher underwriting profits. After all, if the company is collecting more money under its policies but is not paying out significantly more money, then this should result in the company earning more money. In fact though, the company actually wound up paying significantly less in the most recent quarter than it did in the year-ago one. We can see this in the fact that the company did not suffer from any major catastrophes in the fourth quarter of 2019. As noted in the highlights, Travelers only had $85 million worth of catastrophe losses in the most recent quarter. The fourth quarter of last year saw the company incur $610 million of losses due to Hurricane Michael and two major wildfires in California. As there were no similar events in the past quarter, the company did not have these expenses dragging on its results. This had a directly positive impact on the company’s profitability.
As is the case with most insurance companies, Travelers maintains an investment portfolio that consists of all of the excess underwriting profits that it has accumulated over the years. As I have discussed in past articles on the company, about 2/3 of this portfolio consists of municipal bonds. This has unfortunately proven to be a problem for the company during times when interest rates have been rising such as over most of the course of 2018. This is simply due to the fact that bond prices move inversely of interest rates so Travelers saw the value of its bond portfolio decline over that year. This caused the company’s book value to decline over much of that year, which I pointed out in my articles on the company. The Federal Reserve reversed course in 2019 in response to the terrible performance of the market in the fourth quarter of 2018. This had a generally positive impact on bond prices and we see this reflected in the rising value of Travelers’ bond portfolio. This is also reflected in the rising book value per share, which is mostly the mark-to-market per share value of the company’s bond portfolio (although it does include other things as well). There are currently some predictions that interest rates in the United States will be cut further going forward, and if this indeed proves to be the case, then we could continue to see further improvements here in the coming quarters.
In conclusion, this was a very solid quarter for Travelers and investors should be very pleased with the performance of their company. We may also be seeing the early signs of the insurance market tightening up here as Travelers managed to raise its prices across the board without causing customer defections. This had a positive impact on the company’s financial performance, which helps to make up for some of the weakness that we saw in earlier quarters. Overall, Travelers continues to prove that it is a very solid play in the insurance sector and this is something that any investor should appreciate.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.