Travelers is a high quality, disciplined underwriter of insurance that is focused on returning capital to shareholders through dividends and share buybacks.
Current Price: $147 Price Target: $170
Position Size: 1.55% TTM Performance: +27.4%
Thesis Intact. Key takeaways from the quarter:
1. Core business results were solid, beating estimates
· Combined ratio flat YOY at 91.4%
· Net written premiums increased 8% for quarter
· Strong pricing with renewal premiums up
o Business +9.5%
o Bond & specialty +12.7%
o Homeowners +8.2%
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 $92m QOQ due to strong returns in private equity investments as returns from fixed income were level with last quarter.
3. Strong financial position
· Debt to capital ratio of 22.0%
· Most of debt is long term – just issued a 30yr bond yielding 3.05%
· 98.4% 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 2.38% and shareholder yield over 7%
· Repurchased 2.6m shares during Q2 for $401m
· 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
- Analysts’ concerns remain focused on profitability of their auto insurance and workers compensation units (about 25% of premiums), which were an issue prior to the pandemic. Travelers has been raising pricing which should improve profitability.
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
[category Equity Earnings]
$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