Calm Skies Mean Big Profits for Travelers

Lack of catastrophes a boon to TRV — and the sector

By Jim Woods, Editor-in-Chief, Successful ETF Investing, Stock Investor's Blueprint

Mother Nature was kind to Travelers (NYSE:TRV) in the third quarter. In return, the Dow component rewarded shareholders with a huge earnings beat that crushed expectations.

On Thursday, the mega-sized insurer announced a stunning 181% spike in third-quarter earnings to $2.22 a share. That number represents a 38% trouncing of the consensus estimate calling for earnings, and the biggest rise in the metric in three years.

The profit gains came largely as a result of one major factor: the lack of any significant natural disasters. Hurricane season was extraordinarily mild this year, as was tornado season. In fact, the third quarter was one of the tamest for catastrophe payout claims in recent memory.

In terms of operating income, even when you factor in net realized investment losses of $3 million, Travelers still managed to post net income of $864 million vs. net income of $333 million in the same quarter a year ago. That’s a far cry from what the company experienced during the entirety of 2011, when the planet’s wrath played out in the form of what the company called the “costliest catastrophe year on record.” That year resulted in a 48% plunge in annual profits.

Ah, yes. Mother Nature giveth, and she taketh away.

Yet the strength of Travelers’ earnings wasn’t all due to the reduced costs of claims. The company also saw strength in its net investment income, which climbed 4.6% to $722 million in Q3. Travelers also had an underwriting gain of $327 million, a big bounce from Q3 2011, when the company lost $185 million. The so-called combined ratio improved 1,420 basis points to 90.3% in the quarter — the direct result of low catastrophe losses and high underwriting margins.

Perhaps the most impressive thing about Traveler’s results didn’t really have anything to do with natural disasters at all. In fact, management actually was able to hike premiums and increase its underwriting at the same time.

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The result of this confluence of positives for Travelers was a 3.6% spike in the shares in Thursday trading. The stock now trades at all-time highs, and year-to-date TRV is up more than 25%.

For traders long TRV, or for investors with short time horizons, the surge to all-time highs could be a double-edged sword, though.

As I mentioned a moment ago, Mother Nature isn’t a dependable handmaiden. If she feels like blowing in harsh winter storms across the nation this year, Travelers could see a repeat of the downbeat 2011 results. Given the lofty share price, newcomers to the stock here run the risk of getting caught in a catastrophe-induced hurricane of profit-taking.

If, however, you have been long TRV for some time, there’s no reason to move out of the stock while it’s red-hot. And given the dividend yield of 2.6%, you still get paid for sitting there and watching your capital appreciate along with the share price.

For those who can’t get enough insurance stocks, you’re in luck. Some of Travelers’ biggest competitors are soon to report earnings, and there certainly will be cost savings associated with lower catastrophe payouts for them as well.

On Monday, Oct. 22, W.R. Berkley (NYSE:WRB) lets us know how it fared in Q3, and on Thursday, Nov. 1, we get to see how Hartford Financial Services (NYSE:HIG) made out during the quarter ended Sept. 30.

Given the kindness of Mother Nature in Q3, I’m not going too far out on a limb by saying I’m expecting strong results — and quite possibly more than a little gain in both.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

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