We are upgrading The Travelers Companies Inc. (TRV) to Outperform from Neutral based on its prudent underwriting practices and favorable prior-year reserve development that managed to arrest the higher catastrophe losses arising due to Hurricane Sandy. This property and casualty insurer carries a Zacks Rank #2 (Buy).
Why the Upgrade?
Fourth-quarter earnings came in at 72 cents per share, much ahead of the Zacks Consensus Estimate of 4 cents. Revenues increased 2% from the year-ago period to $6.5 billion, easily surpassing the Zacks Consensus Estimate of $6.3 billion. Over the past four quarters, Travelers has delivered an average surprise of 140.7%.
Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 has gone up 2.9% to $7.04 per share. Moreover, the Zacks Consensus Estimate for 2014 has also increased 5.3% to $7.40 per share.
What is the cause for the strong positive bias on the company? As the second-largest writer of auto and homeowners’ insurance through independent agents and the second-largest writer of commercial U.S. property-casualty insurance with a wide array of product offerings, we believe Travelers will continue to benefit from its strong market position and reap economies of scale.
Over the past 8 years, the company has continuously registered better returns on equity (:ROE) than its peers. It currently stands at 9.8% with an operating ROE of 11.0%. Travelers is also striving for a ROE in the band of 14%–16% over the long term.
In 2012, it returned $2.1 billion in capital to its shareholders, including $700 million in dividends. Its current dividend yield is 2.30%. Its dividend yield averaged 2.58% over the last five years, much ahead of the industry yield of 0.96%. In addition, it still has $2.159 billion remaining under its authorization.
Further, Travelers posted the second consecutive quarter of higher investment income.
Other Stock to Consider
Among other property and casualty insurers, companies like Cincinnati Financial Corp. (CINF), XL Group plc (XL) and ProAssurance Corp. (PRA) presently carry a Zacks Rank #1 (Strong Buy) and are worth considering.
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