We are upgrading
The Travelers Companies, Inc.
) to Outperform from Neutral on the back of solid third quarter
performance. The third quarter earnings outperformed our
expectations due to lower catastrophe losses, sturdy underwriting
results and solid investment income. Top line also surpassed our
expectations, driven by the augmentation in premiums earned and
net investment income.
Travelers Business Insurance continued to deliver positive trend
in net written premiums on the back of pricing gains and positive
audit premiums. Though retentions were at a high level, new
businesses somewhat remained lower. The company, however, remains
comfortable with lower business volume as it believes higher
pricing has generated better margins.
After a long gap of five quarters, Travelers enjoyed higher
investment income. Net investment income in the quarter improved
4.6% year over year, largely attributable to better performance
at non-fixed income portfolio. Given the weak interest rate
environment, we expect slow improvement in the net investment
income, though the effect is expected to be neutralized following
the company's efforts to improve its performance.
Travelers has always remained focused on returning more value to
its shareholders. It paid $179 million in dividends in the third
quarter. Its dividend yield is 2.66%, better than that of its
Hartford Financial Services Group
) with a yield of 1.87% and
W. R. Berkley Corp.
) with a yield of 0.93%. The company has also outperformed the
sector average of 1.98%. In the third quarter, Travelers spent
$350 million to buy back 5.4 million shares. The company also
stated that it has excess capital owing to solid operating
results, which it intends to deploy in returning to shareholders.
As a result, it expects share buybacks in the fourth quarter to
be more than the third quarter.
On the flip side, exposure to catastrophe events always remains a
headwind for property & casualty insurers. Though the company
incurred catastrophe loss in the third quarter, it primarily
stemmed from increases in estimated losses associated with wind
and hail storms in several regions of the United States that
occurred in the second quarter.
Travelers has significant exposure to asbestos and environmental
claims and related litigation as a result of high market shares
of historical acquisitions. In the past, the company had to make
reserve additions for its asbestos exposure. We are concerned
that Travelers may continue to take extraordinary reserve
additions for both asbestos and environmental exposure.
Travelers currently carries a Zacks # 2 Rank, implying a
short-term Buy rating.
HARTFORD FIN SV (HIG): Free Stock Analysis
TRAVELERS COS (TRV): Free Stock Analysis
BERKLEY (WR) CP (WRB): Free Stock Analysis
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