Travelers Q4 2020 results

On 1/20, Travelers reported a Q4 EPS of $4.91, soundly beat estimates of $3.20.  Positives for the quarter were improved margins, return on equity of 18.4% and book value growth of 14%.  Gains in pricing remain strongest in a decade which bodes well for future profitability.

 

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

 

Current Price: $138                                Price Target: $160 (raised from $135)

Position Size:   1.67%                              TTM Performance: +6.7%

 

Thesis Intact. Key takeaways from the quarter:

 

  1. Core business results were solid, beating estimates

·         Combined ratio improved 5.7 points to 86.7%

·         Net premiums increased 3% for quarter and 2% for the 2020

·         Strong pricing with renewal premiums up

    • Business +7.3%
    • Bond & specialty +10.9%
    • Personal Insurance +8.2%
    • International +9.7%

·         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.

               

  1. Total net Investment Income rose $47m due to strong returns in private equity investments as returns from fixed income investments fell $36m.

 

  1. Strong financial position
    • Debt to capital ratio of 20.7%
    • 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 continues to return capital with dividend yields 2.45% and shareholder yield over 4%
    • During Q4, TRV repurchased 1.4m shares for $201m.  Full year, TRV repurchased 5.2m shares for $672m. 
    • Over past 10 years shares outstanding have fallen 53%!
    • Management has a long 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 12.4 P/E is close to historical mean.  Price target represents 13.5x 2022’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

[tag TRV]

 

 

 

 

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

www.crestwoodadvisors.com