On Aug 28, 2014, we issued an update research report on The Travelers Companies, Inc. (TRV).
Travelers reported a mixed second quarter with operating earnings missing the Zacks Consensus Estimate and year also results while top line surpassing both parameters.
Higher-than-expected catastrophe losses were largely responsible for the earnings underperformance. However, higher net written premiums and net investment income backed the revenue outperformance.
The company’s focus on implementation of pricing actions drive better returns. Successful pricing actions helped the company to effectively revamp its portfolio with better performing business classes. By virtue of its operational strength, the company has continuously registered better returns on equity than the industry average. Travelers aims for ROE in the band of 14–16% over the long term.
Written rate gains continue to exceed expected loss cost trends in all segments. High retention rate, pricing gains, positive renewal rate changes, and a strong capital position are among the positives. Its inorganic growth story also remains impressive.
In its effort to improve underwriting margins and come up with more competitively priced products, Travelers is focused on reducing operating expenses and acquisition costs. When fully implemented, the cost cut should lead to an annualized savings of $140 million in 2015.
Travelers remain committed to enhance its shareholders’ value via share repurchases and dividends. The company has grown its dividend at a 10-year CAGR of 9.6%. Its dividend yield also betters the industry average. Travelers in total returned about $1.9 billion of excess capital in the first half. The property and casualty insurer also continually engages in share buyback and has $3.23 billion remaining under its authorization.
However, exposure to catastrophe events always remains a headwind for property and casualty insurers. While underwriting income declined 8.5%, combined ratio deteriorated 80 basis points in the quarter.
In addition, management expects lower reinvestment yields from the fixed maturity portfolio to lower net investment income from that portfolio by $25 million in each of the remaining quarters of 2014. It also estimates investment income from the non-fixed maturity portfolio in 2014 to be lower than the 2013 level.
With respect to estimate revisions, the Zacks Consensus estimate for 2014 moved down 0.5% to $9.23 as 9 of 16 estimates moved south in the last 60 days. For 2015, the same moved up 0.9% to $9.14 as 8 of 18 estimates moved north over the same time frame.
Other Stocks to Consider
Travelers carries a Zacks Rank #3 (Hold). Better-ranked property and casualty insurers worth considering are Global Indemnity plc (GBLI), AmTrust Financial Services, Inc. (AFSI) and Endurance Specialty Holdings Ltd. (ENH). All these stocks sport a Zacks Rank #1 (Strong Buy).
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