The companys investment portfolio generated pretax

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higher combined ratio was due to weather-related losses, which we don’t see as recurring problems, and higher expenses. The company’s investment portfolio generated pretax net investment income of $603 million in 1Q18, down from $610 million a year earlier, reflecting lower returns from private equity. To generate our EPS estimates for the insurance industry, we focus on ROE, which is smoother and more predictable than catastrophe losses and net prior-year reserve development. TRV has an impressive ten-year average ROE of 13.0%, and recent years have been even more profitable. The company recorded a full-year operating ROE of 15.2% in 2015, 13.3% in 2016, and 9.0% in 2017. We expect ROE to stabilize and to rise well above the peer average of 7.3%. We think that the company has managed its risk exposure particularly well in the face of the insurance losses from the hurricanes, wildfires, and storms. Although insurance is TRV’s primary business, its investment returns, which contribute significantly to ROE, have been hurt by low alternative investment performance — despite some improvement over the last four quarters. Returns have also been weak on the company’s massive bond portfolio due to low interest rates. However, as interest rates rise, we expect investment returns to benefit. The company has also been raising prices in its auto lines, which we expect to improve results over the next two years. Dividend increases and a new share buyback program should also boost shareholder returns. We are maintaining our 2018 EPS estimate of $10.43. We expect higher premium growth, improved margins and a more normal level of catastrophe losses throughout the rest of the year. Our 2018 outlook assumes 2% revenue growth and 43% EPS growth. We are lowering our 2019 estimate to $10.54 from $10.56. FINANCIAL STRENGTH & DIVIDEND We are maintaining our High financial strength rating based on a review of the company’s leverage, coverage ratios and profitability. As of March 31, the total debt/capital ratio was 23%, compared to 20% for peers. In 1Q18, operating income covered interest expense by a factor of 10.3, above the peer median of 7.0. The 1Q adjusted profit margin was 8.6%, compared to 7.8% for peers. Core ROE was 11.9%, above the peer median of 7.3%. Concurrent with earnings, the board raised the quarterly dividend by 7% to $0.77 per share, or $3.08 annually, for a yield of about 2.3%. The dividend is payable on June 29 to shareholders of record as of June 8. Over the past five years, the board has raised the dividend at a CAGR of 9%. Our dividend estimates are $3.03 for 2018, raised from $2.94, and $3.23 for 2019, raised from $3.02. Travelers also has a share buyback program. In 1Q18, the company bought back 2.8 million shares for $401 million. It has $4.2 billion remaining on its current authorization.
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M ARKET D IGEST - 17 - MANAGEMENT & RISKS Alan Schnitzer, 51, became CEO in December 2015 after joining Travelers in 2007 as chief legal officer. He previously served as outside counsel to Travelers. Mr. Schnitzer led multiple Travelers businesses before becoming CEO. Of note, his wife’s stepfather also served as CEO of Travelers from 2001 to 2004.
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