On 4/21, Travelers reported a solid Q1 EPS of $2.62, slightly lower than estimates due to higher than expected catastrophe losses. Travelers took an $86m pretax charge for Covid-19 which was a $0.27 drag on EPS. While some operations are seeing modest effect from the shutdowns, the full effect is still unknown. Balance sheet remains strong and Travelers continues to buy shares and raised its dividend.
With the shutdowns, Travelers benefits from falling claim frequency (like fewer miles driven) and seems insulated from business disruption claims as most policies will not cover them. However, they are not sure of revenue disruptions due to bankruptcies. Also, California forced car insurance companies to refund some premiums due to shutdowns, so there is the potential for additional negative developments on the legislative front. For Q2 Travelers expects downward pressure on premiums and net investment income. Historically, Q2 has had the highest cat losses. Given the stock traded unchanged for the day, it seems the street was expecting this news or worse.
Good news is pricing remains very strong with renewal pricing gains from 5.8% to 7.8%. On the call there was little discussion of tort costs which was a big negative for last quarter. Perhaps Travelers has adjusted their reserves accurately.
Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks.
Current Price: $104.30 Price Target: $120
Position Size: 1.92% TTM Performance: -23.8%
Thesis Intact. Key takeaways from the quarter:
- Decent quarter with core income of $676m
· Core combined ratio of 91.3%
· Net premiums up 4%
· Strong pricing with renewal premiums up 5.8% to 7.8% which
- TRV continues to aggressively return capital to shareholders – for Q1 2020 TRV spent $471m to repurchase shares and raised dividend to 3.26% yield – shareholder yield of 4.7%
- Sign of confidence from management that their balance sheet is strong enough to continue to buyback shares and increase dividend.
- Over past 10 year shares outstanding have fallen 53%!
- Management employing capital wisely! Instead of investing in mature business with spotty pricing, they are returning excess capital to shareholders
3. Valuation of 10.8x P/E is in well below historical average of 12.1x. Price target represents 13x this year’s earnings.
The Thesis on TRV:
- We expect TRV will be able to grow book value per share in the mid-single digits over the near-medium term, and generate ROE in the 10-14% range
- Industry leader with disciplined underwriting and investment portfolio track record
- Consistent returns in the low to mid double digits
- Responsible capital allocation and proven desire to act in the best interests of shareholders
Please let me know if you have any questions.
Thanks,
John
($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