The Travelers Companies (NYSE:TRV) is an insurance company focused on the P&C market. It has a stable business, enjoying good profitability level and strong capitalization that enable it to provide an attractive shareholder remuneration policy. Its dividend and share repurchases track record are very strong – a situation that should continue going forward. Given that its valuation seems fair, its investment theme is mainly related to its capital return prospects, which are quite good in the next few years.
Travelers is a leading provider of property casualty (P&C) insurance for auto, home and business. Its distribution is primarily through independent agents and brokers. It is a component of the Dow Jones Industrial Average and has a market capitalization of about $33 billion.
The company operates under three main business segments, namely Business Insurance, Bond & Specialty Insurance and Personal Insurance. Travelers has a particularly strong position in Commercial Insurance and Personal Insurance, being among the top 3 players in the market. Its share of the overall P&C market in the U.S. is about 5%.
By net premiums, its largest unit is Business and International Insurance accounting for about 59% of total premiums, followed by Personal Insurance (33% of premiums). Bond & Specialty Insurance generates 8% of premiums. About 95% of its business is based in North America and the company is not expected to pursue much growth internationally in the next few years.
Its investment portfolio is quite conservative, reflecting its goal of keeping a high company credit rating. About 95% of its portfolio is allocated to fixed income securities, while risky assets such as equities, private equity or real estate have a small weight within the investment portfolio. Its average duration is only 4.2, thus it can reinvest relatively rapidly its portfolio and benefit from higher interest rates.
Over the past few years, its investment income has declined due to lower reinvestment yields, but it may start to recover in the next few quarters as higher bond yields feed into its investment portfolio.
Despite operating in a mature and competitive market, Travelers has been able to increase steadily its premiums over the past few years. Nevertheless, its growth is relatively low, reporting a net premiums written compounded annual growth rate [CAGR] of 2.7% over the past five years. Its book value per share also has grown consistently over the past few years, showing that the company has increased value for shareholders.
Regarding its financial performance, Travelers has reported mixed performance over the past few years, and modest top-line growth has not been enough to support its bottom line.
In 2016, its net premiums were close to $25 billion, representing an increase of 3.4% from the previous year. The pricing within the P&C market has softened during the past few quarters and premiums growth may be hard to achieve organically. A boost to premiums growth may come from the potential infrastructure program in the U.S. following Trump’s election, boosting Travelers’ commercial lines of business.
Travelers has a very good underwriting history. Its consistent combined ratio, a key measure of operating profitability for P&C insurance, is at about 90%. A combined ratio below 100% means that insurance companies are making an operating profit, which is very important for overall earnings.
Travelers’ combined ratio has been stable over the past few years, but has deteriorated to 92% in the past year (from 88.3% in 2015). Travelers was negatively impacted by catastrophe losses and lower reserve releases than in previous years, something that should reverse to normalized levels in the coming years supporting its earnings power.
Despite its relatively stable operating momentum, Travelers’ net profit amounted to $3 billion, a decrease of 12% from the previous year. Its net profit was impacted by lower investment income and worse combined ratio. Its earnings per share [EPS] declined by 5.5% to $10.3, a steeper decrease than net profit due to its share buybacks.
Despite its profit decrease, Travelers maintained a very good profitability level, which is above the average of its peers. Its return on equity [ROE] has been around 14% over the past few years and in 2016 declined to 12.5% – a ratio that still shows a good profitability level within the P&C insurance sector.
In the first quarter of 2017, the company reported poor figures impacted by catastrophe losses. Its EPS was $2.16, much lower than consensus estimate of $2.35. The miss was largely due to higher catastrophe losses related to tornado events. Its combined ratio was 96%, or 91% without extraordinary events. Its net income was $614 million, representing a decrease of 12% from the same quarter of the previous year.
Going forward, Travelers should report modest underlying earnings growth, as the P&C pricing is softening and its expansion prospects are limited. On the other hand, it should benefit from lower potential U.S. corporate tax rates and share buybacks will continue to boost its EPS growth. If tax rates are cut has proposed during the presidential campaign, Travelers’ earnings will increase by about 15% and its ROE will increase by more than 100 bps, but there are growing doubts as to whether Trump can deliver what he has promised, and it is very uncertain when tax cuts will be implemented.
Dividends & Share Buybacks
Regarding its capitalization, Travelers has a strong financial position with a debt to capital ratio of 22%, within its own target range and target levels for rating agencies. This position means that Travelers is very well capitalized and does not need to retain as much cash going forward, supporting an attractive shareholder remuneration policy.
Travelers has a very good dividend track record, paying dividends without interruption for 145 years and delivering a growing dividend over the past decade. More recently, its dividend has grown at about 10% per year, a very good achievement taking into account the company’s limited growth prospects.
Its last annual dividend was set at $2.62 per share, an increase of 10.1% from the previous year. At its current share price, Travelers offers a dividend yield of about 2.4%. Even though this is not an impressive yield, it is above both the insurance sector average and the S&P 500 index, and therefore it is a better income play than many of its peers. More recently, it increased its quarterly dividend by 7.5%, from $0.67 to $0.72 per share.
Its dividend payout ratio remains very conservative at about 30%, which gives plenty of room for dividend growth in the coming years. Indeed, according to analysts’ estimates, its dividend should continue to increase in the next three years at about 8% per year, even though its net profit is expected to remain stable during this period. Some dividend growth should come from a slightly higher dividend payout, but the vast majority is explained by the company’s large share repurchases.
Due to its excess capital position, Travelers has returned more capital than its annual earnings to shareholders, considering both its dividend and share buyback programs. Over the past three years, its net payout has been on average about 110% of annual profit, showing its strong commitment to return excess capital to shareholders. In the past year, the company has spent about $2.5 billion on share repurchases or about 7.5% of its current market capitalization.
In the past quarter, the company has softened share repurchases to only $225 million to provide more financial flexibility due to its pending acquisition of Simply Business, but has authorized further $5 billion of share buybacks. Therefore, share buybacks should continue at an elevated pace in the next few quarters as the company does not need to retain cash due to its strong financial position. Including share buybacks, Travelers offers an attractive shareholder remuneration policy, even though its dividend yield is not impressive.
Travelers is a quality insurance company with a relatively stable business and good profitability. However, its growth prospects are quite low and current business momentum has deteriorated due to catastrophe losses. This business profile seems to be reflected in its valuation, given that it is trading at about 1.4x book value which seems fair.
Therefore, Travelers’ investment theme relies heavily on its good capital position and attractive shareholder remuneration policy. Its dividend yield of 2.2% is not particularly impressive, but the company has made sizeable share repurchases in the past few years and should maintain this policy in the near future. Additionally, its dividend has good growth prospects due to its low dividend payout ratio, making Travelers attractive for dividend growth investors.
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