We retain our Outperform recommendation on The Travelers Companies Inc. (TRV) owing to its strong third-quarter 2013 results, which clocked an 18% positive earnings surprise. The prosperity and casualty insurer carries a Zacks Rank #2 (Buy).
Why the Reiteration?
Travelers’ third-quarter operating net earnings of $2.35 per share surpassed the Zacks Consensus Estimate by 18% and the year-ago earnings by about 6%. The outperformance was driven by improvement in underlying underwriting gains. Lower share count also boosted the bottom line.
Travelers has been witnessing rising earnings estimates. The Zacks Consensus Estimate for 2013 rose nearly 8% to $8.81 as 16 of 18 estimates moved north over the last 60 days. 12 of 18 estimates were raised over the same time frame lifting the Zacks Consensus Estimate by 2.2% to $8.03 for 2014.
In its concerted effort to return more value to its shareholders, the board of directors of Travelers approved an additional $5.0 billion worth of share repurchases. It also has $759 million remaining under its earlier authorization. Travelers in total returned $1.952 billion to its shareholders in the third quarter of 2013 in the form of share buybacks and dividends.
Travelers has always considered mergers and acquisitions to grow inorganically. Recently, Travelers acquired The Dominion of Canada General Insurance Company from E–L Financial Corporation Limited. The acquisition will strengthen its foothold in Canada. With solid financial strength and flexibility, we expect Travelers to pursue strategic acquisitions even in future in order to ramp up its growth profile.
Travelers is focused on reducing operating expenses and acquisition costs in order to improve underwriting margins, which in turn will allow it to come up with a more competitively priced product. The company’s expense reduction initiatives include the announcement of a plan to reduce certain claim and other insurance expenses, with the majority of the impact in the Agency Automobile line of business. This, when fully implemented, is expected to lead to annualized savings of $140 million in 2015.
With respect to the product portfolio, the company remains upbeat about its new product Quantum 2.0. It expects this lower cost, lower-priced Auto insurance product to help it improve volumes at attractive returns.
Other Stocks to Consider
Other property and casualty insurers, which look attractive at current levels are Alleghany Corporation (Y), Aspen Insurance Holdings Ltd. (AHL) and Cincinnati Financial Corp. (CINF). All these stocks carry a Zacks Rank #1 (Strong Buy).