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Travelers Continues to Gain From Premiums, Cat Loss a Drag

Zacks Equity Research
Travelers (TRV) consistently raises optimism with revenue growth, a wide menu of product offerings as well as a robust capital position. However, exposure to cat loss remains a woe.

The Travelers Companies, Inc. TRV has built a reputation, offering a wide range of property and casualty (P&C) insurance plus surety products and services. Historically, the clients have largely benefited from the company’s wide array of insurance products and services. By retaining this optimism, the company 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, gaining from it and 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 a consistent stability in the markets wherein it is operational as well as renders a wise strategic execution. Further, riding on the strength of agency auto and homeowners business, the insurer expects its personal lines business to display better-than-expected performance going forward.

Investment income has been contributing to the top line over the past several quarters as an important component of insurers, backed by higher private equity returns. For 2019, Travelers Companies projects about $20-$25 million of higher after-tax net investment income on a quarterly basis compared with the same in 2018.

Also, the company has been seeing improving premiums over the past few years, primarily driven by growth in each business segment. Given this increasing trend, the insurer remains optimistic about the same moving on.

On the back of improving investment income and premium growth, the company has been witnessing an upward trend in its top line, which in turn, is likely to accelerate the company’s overall growth.

Underlying underwriting margin is a measure to assess the company’s performance 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. While dividend yield of 2.39% is better than the sector yield of 2.29%,it has $3.9 billion left under its existing share repurchase authorization.

Being a P&C insurer, the company has been suffering catastrophe loss for a considerable period of time, rendering volatility to its earnings.

Nonetheless, underlying combined ratio is likely to trend lower for Business Insurance and Personal Insurance segments for the remainder of 2018 compared with the reported figure in 2017. With respect to Bond & Specialty Insurance, the metric is expected to remain consistent for the next two quarters with the levels recognized in the same period of 2017. For the final 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 during fourth-quarter 2017.

Stocks That Warrant a Look

Investors interested in other stocks from the insurance industry can consider Alleghany Corporation Y, NMI Holdings Inc. NMIH and The Progressive Corporation PGR.  

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%.

NMI Holdings provides private mortgage guaranty insurance services in the United States. The company pulled off positive surprises in all the trailing four quarters with an average earnings surprise of 29.85%.

Progressive Corporation provides personal and commercial auto insurance, residential property insurance and other specialty property-casualty insurance plus related services, primarily in the United States. The company came up with positive surprises in all the preceding four quarters with an average beat of 9.19%.

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