Travelers (TRV) reported Q3 EPS of $.91, well above consensus of $0.42. Earning expectations had dropped due to expected losses from hurricanes. Travelers’ hurricane losses were only 2% of book value which is lowest of all the major insurers, showing excellent risk management. Traveler’s combined ratio was 103.2%, excluding catastrophic losses the ratio was 92.9%. Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders.
Current Price: $132.8 Price Target: $125
Position Size: 2.3% TTM Performance: +17%
Thesis Intact. Key takeaways from the quarter:
1. Results were solid considering the major hurricanes
• Solid premium growth 4% and retention rates of 87%
• Higher than expected income from investments +11% with strength in private equity
• Slight rise in combined ratio 92.9% from 92.8%
• ROE 8.3% which declined from 12.2% YoY due to storm losses
2. TRV continues to aggressively return capital to shareholders – $328m buybacks during Q3 as part of a $5b share repurchase agreement
• Real yield of over 10% (Buyback 8.5% + 2.1% Dividend)
• Over the past five years, an average of 93% of annual free cash flow has been returned to shareholders for a reduction in shares of 34% – wow!
3. Travelers increased book value 4% YoY which is impressive given share buybacks reduce book value growth
• Valuation has improved at the margin but we continue to view TRV as fairly valued (1.5x BV and P/E 15.7) relative to current ROE and BV growth – in the context of the broader market environment – and given the balance of slower pricing offset by a robust 10% real shareholder yield
The Thesis on TRV:
• We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range
• Industry leader with disciplined underwriting and investment portfolio track record
• Consistent returns in the low to mid double digits
• Responsible capital allocation and proven desire to act in the best interests of shareholders