Travelers released a strong first-quarter report in what is typically a quiet period for property-casualty insurers. Given the lack of natural catastrophes, the firm was able to achieve operating income –which excludes realized investment gains and losses– of $887 million or $2.31 per share. The latter figure was Travelers’ highest since it went public in 2002.
The pricing gains the firm has achieved in prior quarters are continuing and, in fact, accelerating. Travelers achieved an average renewal rate increase of 8% in its Business Insurance segment, a very positive sign after many years of declines during the recent soft market. As the firm is able to write more business at favorable prices, underwriting margins should expand if all else remains equal.
This trend played out in the quarter, as the firm improved its combined ratio by 3.7 percentage points year-over-year to 88.5%. Written premiums were only up 2% as rate gains were partially offset by lower business volumes, especially in the firm’s Personal Insurance and Financial, Professional & International Insurance segments. Offsetting the positive news on the pricing and premium front, investment income continues to decline, this quarter at the rate of 9.5%. The low yield environment will be an increasingly large issue for insurers as they are forced to either roll a larger portion of their portfolios into lower returning securities or move further out on the risk curve.
Travelers continues to repurchase shares, this quarter at a rate of $300 million. While we generally are in favor of companies returning excess capital to shareholders, the repurchases are not looking as great as they once were with the average price of buybacks coming in at approximately 1.2 times end-of-quarter book value. We understand, however, that there may be practical concerns to alternative forms of capital return such as special dividends. The firm also announced it paid down $500 million in maturing debt and increased the dividend by 9%.
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