Private Equity Returns Boost Travelers Q4 Profit

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Travelers Cos., the only property/casualty insurer in the Dow Jones Industrial Average, said fourth-quarter profit jumped 8.9 percent as investment income improved and the company recorded a gain tied to the settlement of a risk-sharing dispute.

Net income rose to $943 million, or $3.28 a share, from $866 million, or $2.83, a year earlier, the New York-based company said Tuesday in a statement. Operating profit was $3.20 a share, beating the $2.81 average estimate of 22 analysts surveyed by Bloomberg. Travelers was helped by higher returns from private equity, which countered pressure on the investment portfolio from low bond yields.

Chief Executive Officer Alan Schnitzer, who took over in December 2015, has been seeking to revive investor confidence after profit declined for four straight quarters through Sept. 30. Morgan Stanley, Goldman Sachs Group Inc. and Atlantic Equities have all cut their ratings on the insurer to sell this month, citing risks including higher costs from auto policies as more drivers get in car crashes.

“While homeowners profitability remains strong, we are disappointed with the underwriting results in personal auto and are taking pricing and other actions to improve its profitability,” Schnitzer said in the statement. “In our commercial businesses, we continue to be pleased with the stability of the markets in which we operate and the execution of our strategies.”

Investment income climbed 12 percent to $493 million. The contribution from beyond the bond portfolio more than tripled to $96 million, fueled by gains from private equity.

Underwriting Gain

The underwriting gain in the business and international segment, the company’s largest, climbed 8 percent to $391 million. For personal insurance, which includes both auto and home coverage, the figure plunged 90 percent to $23 million.

The one analyst tracked by Bloomberg who upgraded Travelers this year, Macquarie Group Ltd.’s Amit Kumar, advises investors to buy the stock on the prospect that an expanding U.S. economy will increase demand from business clients for coverage. Travelers is one of the largest commercial insurers in the U.S. and offers products including workers’ compensation coverage and policies for fleets of vehicles.

Policy sales advanced 3.3 percent to $6.06 billion in the fourth quarter from $5.86 billion in the last three months of 2015. The insurer charged domestic business insurance customers 2.5 percent more at renewal in the three months ended Dec. 31, according to a presentation. That compares with a 2.6 percent increase in the third quarter.

Bond Yields

The fourth-quarter combined ratio was 90 percent, meaning Travelers kept 10 cents of every premium dollar after claims and expenses. That worsened from 86.6 percent in the year-ago period.

The stock had declined 3.6 percent this year through Monday in New York trading to $118.04, compared with the 0.2 percent increase in the 30-company Dow Average.

Book value, a measure of assets minus liabilities, slipped to $83.05 a share as of Dec. 31, from $86.04 three months earlier. Bond yields rose after Donald Trump’s surprise victory in the U.S. presidential election, pressuring the market value of fixed-income securities. The insurer repurchased $751 million of shares in the quarter.

Pretax catastrophe costs jumped to $137 million from $46 million a year. U.S. insurers were pressured in the period by Hurricane Matthew, which battered the Florida coast, and Tennessee wildfires.

The gain from reserves was $264 million pretax, narrowing from $292 million a year earlier. Insurers regularly reassess the money they’ve set aside for future claims and can scale back or raise the amount based on their expectation of losses.

Morgan Stanley’s View

“Favorable development has bolstered Travelers’ earnings by about 17 percent in last three years, higher than the industry average and all other domestic companies that we cover,” Morgan Stanley’s Kai Pan said in a Jan. 5 note. “This could pose a risk to future earnings should reserve releases slow.”

The company said in November that it would record a pretax gain of about $126 million from a settlement in a reinsurance dispute.

Return on equity for the quarter was 15.8 percent, a gain from 14.5 percent in the fourth quarter of 2015. ROE for the year slipped to 12.5 percent from 14.2 percent. Annual net income fell 12 percent to $3.01 billion.