Travelers Insurance Q3 results

On 10/20, Travelers reported a Q3 EPS of $3.12, beating estimates of $2.99.  Positives for the quarter were improving margins, core return on equity of 13.5% and continued strong pricing gains in business and personal insurance lines.  Paradoxically, COVID-19 has improved profitability due to fewer claims in auto.

 

Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks. 

 

Current Price: $123.92                           Price Target: $135 (raised from $120)

Position Size:   1.66%                              TTM Performance: -2.58% (up 14% since 9/30)

 

Thesis Intact. Key takeaways from the quarter:

 

  1. Core business results were solid, beating estimates

·         Combined ratio improved 6.6 points to 94.9%, ex-cats it improved 2.6 points to 91.5%

·         Net premiums increased 3%

·         Strong pricing with renewal premiums up:

    • Business +6.3%
    • Bond & specialty +8.1%
    • Personal Insurance +8.2%
    • International +7.3%

·         The industry has faced several headwinds – higher cat losses, negative tort trends and falling yields.  As a result industry wide pricing has been strongest in 10 years.

·         Losses related to COVID-19 total $133m driven primarily by worker’s compensation.  These loses were more than offset by lower claims in auto.  Net impact of COVID-19 has been a positive 2% points to the combined ratio.

               

  1. Net Investment Income rose $38m due to strong returns in private equity investments.

 

  1. Strong financial position
    • Debt to capital ratio of 22.7%
    • Most of debt is long term – just issued a 30yr bond yielding 2.5%
    • 97.9% of fixed income portfolio is investment grade with average rating of AA
    • Strong rankings from rating agency relative to peers

 

  1. TRV yields 2.7%.
    • No share buyback due to pandemic. TRV has built roughly $800m in excess capital.
    • Prior to pandemic, TRV has long record of returning capital to shareholders – past 10 years shares outstanding have fallen 53%!
    • Management has a history of employing capital wisely! Instead of investing in mature business with spotty pricing, they are returning excess capital to shareholders

 

  1. Current valuation of 12.2 P/E is close to historical mean.  Price target represents 13x 2021’s estimated 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