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Travelers Impresses With Revenue Growth, Cat Loss a Woe


The Travelers Companies, Inc. TRV has made a name for itself, offering a wide range of property and casualty (P&C) insurance plus surety products and services. Its reputation rides high on the successful catering to its clients’ diverse needs. Historically, the clients have largely benefitted from the company’s bouquet of diverse insurance products and services and by retaining this optimism, the Zacks Rank #3 (Hold) P&C insurer continues to evolve stronger over time and looks set to repeat its winning streak in the near future.

Growth Drivers

As a leading provider of property-casualty insurance for auto, home and business, Travelers has been able to sustain its strong market position and benefit from it, reaping economies of scale. The company remains focused on implementing pricing and other actions to continue increasing returns and more importantly, improving profitability.

The P&C insurer’s commercial business has been delivering a solid performance, driven by consistent stability in the markets where it is operational as well as renders wise strategic execution.

Investment income, an important component of insurers’ top line, has been improving over the past several quarters, backed by higher private equity returns. The P&C insurer anticipates witnessing better investment results in the near term owing to a slow but steady improving pace of interest rates. For 2018, Travelers Companies projects about $25-$30 million of higher after-tax net investment income on a quarterly basis compared with the same in 2017.

On the back of improving investment income and premium growth, the company has been witnessing an upward trend in relation to its top line. We expect the company to continue displaying this positive trend in the near term, which in turn is likely to accelerate the company’s overall growth.

Underlying underwriting margin is a measure to assess the performance of a company or its segments. On the back of inherent strengths, Travelers estimates higher underlying underwriting margins for the remainder of 2018 across its Business Insurance, Bond & Specialty Insurance and Personal Insurance than the recorded tally in 2017.

A strong capital position aids the company to return value to its shareholders via dividend hikes and buybacks. The company has made 14 straight dividend raises, witnessing a 14-year CAGR of 10%. Also, its dividend yield of 2.37% is better than the industry yield of 2.36%. It has $4.2 billion left under its existing share repurchase authorization.

Shares of Travelers have gained 8.4% in a year’s time, underperforming the industry’s 17.6% rally. However, we expect the company’s aforementioned strengths to turn the stock around in the near term.

Growth Projections: The stock has seen the Zacks Consensus Estimate for current-year earnings per share being pegged at $10.44 on revenues of $29.46 billion. While the top line reflects a year-over-year rise of 2.9%, the bottom line represents an increase of 43.4%. For 2019, the consensus mark for the metric stands at $11.30 on $30.64 billion revenues. While revenues represent a 4% improvement, earnings reflect 8.3% growth.

Positive Earnings Surprise History: Travelers displays an encouraging earnings surprise history, having outpaced the Zacks Consensus Estimate in two of the trailing four quarters with an average beat of 43.50%.

Near-Term Headwinds

Being a P&C insurer, the company has been suffering catastrophe loss for a considerable period of time, thus rendering volatility to its earnings. Such a massive loss has already hurt the company’s underwriting profitability with the combined ratio deteriorating in the last few years.

Nonetheless, underlying combined ratio is likely to trend lower for Business Insurance and Personal Insurance segments for the remainder of 2018 compared with the recorded figure in 2017. With respect to Bond & Specialty Insurance, the metric is expected to remain consistent for the next two quarters with the levels reported in the same period of 2017. For the last quarter of 2018, the company predicted the combined ratio to be lower year over year, attributable to a charge for a single international surety loss in fourth-quarter 2017.

Stocks to Consider

Some better-ranked stocks from the insurance industry are Alleghany Corporation Y, Markel Corporation MKL and RLI Corp. RLI, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.

Markel markets and underwrites specialty insurance products in the United States, the United Kingdom, Canada and internationally. The company came up with positive earnings surprises in two of the last four quarters with an average beat of 15.54%.

RLI Corp. underwrites property and casualty insurance in the United States and internationally. The company pulled off positive surprises in each of the last four quarters with an average beat of 33.65%.

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