Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks.
Current Price: $156 Price Target: $170 (raised from $160)
Position Size: 1.71% TTM Performance: +59.6%
Thesis Intact. Key takeaways from the quarter:
1. Core business results were solid, beating estimates
· Combined ratio improved 1.8 points to 89.5%
· Net premiums increased 2% for quarter
· Strong pricing with renewal premiums up
o Business +8.0%
o Bond & specialty +10.8%
o Homeowners +7.7%
o International +6.9%
· 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.
2. Total net Investment Income rose $71m due to strong returns in private equity investments as returns from fixed income investments fell $31m.
3. Strong financial position
· Debt to capital ratio of 20.5%
· Most of debt is long term – just issued a 30yr bond yielding 2.5%
· 98.2% of fixed income portfolio is investment grade with average rating of AA
· Strong rankings from rating agency relative to peers
4. TRV continues to return capital with dividend yields 2.24% and shareholder yield over 6%
· Raised dividend 4%
· Book value growth of 9%
· Over past 10 years shares outstanding have fallen by 53%!
· Management has a long history of employing capital wisely! Instead of investing in mature business with spotty pricing, they have returned excess capital to shareholders
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