On 10/21/19, Travelers reported Q3 EPS of $1.43, well below consensus estimate of $2.34. Shares sold off ~8% on the earnings miss. Travelers missed earnings due to increases in reserves in their business segment due to higher than expected losses in asbestos claims and higher tort cost for general liability and auto. The rising costs appear to be an industry trend. In response business policy renewal rates have increased to 7.4% which Travelers expects will offset the higher cost trend and restore profitability. Travelers seems to be early/leading the industry with increases in reserves.
Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks. Insurance earnings are historically volatile, so we are maintaining price target and weight, expecting that Travelers will return to its profitability trend.
Current Price: $131.43 Price Target: $155
Position Size: 2.16% TTM Performance: 10.9%
Thesis Intact. Key takeaways from the quarter:
- Higher losses on tort related expenses
· Generally, insurance companies record revenue in one period and hold reserves to pay for claims in future periods. If they reserve more than they pay out in claims, the excess reserves will be released as earnings. The reverse happened this quarter for Travelers as claim trends were higher than expected which required an increase reserves.
· Q3 saw adverse development in asbestos claims of $228mm, in general liability of $114 and commercial auto of $134 primarily due to inflation on tort related settlements.
- TRV continues to aggressively return capital to shareholders – for 2019 year to date TRV returned $1.8b to shareholders out of $1.8b in earnings
- Over past 10 year shares outstanding have fallen 53%!
- Shareholder yield of 7.1% = 2.5% dividend and 4.6% share buyback
- Management employing capital wisely! Instead of investing in mature business with spotty pricing, they are returning excess capital to shareholders
- Some positives in the quarter
- Importantly, Travelers is increasing prices significantly – up 7.4% – to offset higher costs of future claims
- Record net premiums of $7.569b up 7%
- Book value per share $99.21 up 14% from year end 2018
- Q3 ROE of 6.2% with YTD ROE of 9.6%
4. Valuation of 13 P/E is slightly above the median of its five-year valuation range of 10 – 15.
The Thesis on TRV:
- We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range
- Industry leader with disciplined underwriting and investment portfolio track record
- Consistent returns in the low to mid double digits
- Responsible capital allocation and proven desire to act in the best interests of shareholders
Please let me know if you have any questions.
Thanks,
John
($TRV.US)
John R. Ingram CFA
Chief Investment Officer
Partner
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109