Traveler companies: A stock to own in this chaos (NYSE: TRV)
Boy, this market is tough. Really difficult. Dividends helped, but stocks were generally crushed. So what is the right type of stock to own in this environment? We think these are the names that are needed. Insurance is necessary. But when to buy? We believe we are at levels that you can start integrating into the names you like, even if the market continues to decline. We must remind you that we do not (and will not) support the sale of anything. We support adding long-term investments, making short-term trades aggressively, and hedging your portfolio with inverted funds or market put options.
Today we have a stock that we believe is suitable for this environment to start buying. It is relatively stable and is an investment geared towards dividend growth. The name in question is The Travelers Companies (NYSE: TRV). It’s a dividend growth name that’s on sale, but should see relatively robust business even in a recession, as insurance is a requirement in most states and a must for many. consumers and businesses. Listen, the backdrop stinks here, but we need to start buying quality when it’s on sale. We’ll never hit bottom, so we choose our spots. Much of what happens to this stock is a result of the macro environment. The VIX is now over 30 here. It’s like we’re in a minor degree of panic-like action, with this index hitting the 30s. There hasn’t been a day of complete washout or complete surrender, but this week we’ve seen signs of surrender starting with major gains after being completely wiped out yesterday, and more. We continue to believe that the bottom of the market will be reached at the end of October and that we will see a recovery at the end of the year after the elections. However, profits will be key, along with any revisions. With The efforts of the Federal Reserve to reduce creeping inflation, equities have largely priced in a recession, although we think well-capitalized insurers are a place to be. Let’s talk.
Dividend growth is important, but watch performance
Just because a stock offers relatively stable dividend growth and yields over time doesn’t mean we stop paying attention to it. Always look at performance. When the recent results were released, we felt the insurer continued to be a solid business and a future investment. As the market sells everything, keep in mind the strong growth in dividends.
So this growth is solid because you get paid to wait. Moreover, it offers a chance to capitalize your investment in the long term. In this column, we’ll discuss the performance metrics you need to be aware of. The title has been slammed lately, but it’s been a good quarter. We do not view inflation as extremely detrimental to business. Maybe some overdue premium payments are going up, but it all depends on claims volume versus net premiums written. We think it’s prudent to highlight some of the critical metrics you should be watching.
The quarter saw strong revenue and net income. The insurer continues to be incredibly profitable, and frankly, the market has priced the stock forward to post much worse results, in our view. Disaster losses come and go, and that’s what matters. Earnings this quarter were higher than expected. It’s the nature of being an insurer. For every quarter with these kinds of gains, there will be others with far more claims than expected. Remember that.
As for what we need to look for, like monitoring net income, base income, customer base (net written premiums) and underlying combined ratios. The name continues to be the one we recommend for the long term, even if the short term is volatile.
Net and basic income measures
Travelers reported net income of $551 million or $2.27 per share in the second quarter. That’s down sharply from $934 million a year ago, or $3.66 per share. This may seem mediocre by comparison, but last year was a very unusual year with low catastrophe losses. This is a more normalized quarter. When we look at the last few years, the income structure shows that there is variability in income, and that is precisely the nature of the requests. They vary. The company has just been hit by claims, sometimes severe, and other times, the claims are light. This one was average. Thus, base income fell to $625 million, or $2.57 per share. Of course, due to the more normal nature of this quarter, but also better than expected.
Assuming catastrophe losses were in pace with historical norms and factoring in some weather headwinds in March, we were looking for core earnings of $2.25-2.55, which also factored in growth 5-6% of net premiums written, but assumed even higher losses on claims. While the results were certainly well above our expectations, they directly highlight the volatility and unpredictable nature of insurance. Difficult to assess, but the company continues to do well.
Also keep an eye on these measures
It was a good quarter in many ways, and not just in terms of revenue. Although the combined ratio fluctuates, it increased compared to last year from 95.3% to 98.3%. But for the first half of 2022, it is down compared to the first half of 2021 at 94.8%.
The underlying combined ratio remains solid at 92.8%, but was up from 91.4% last year. Even with the increase, this remains among the industry leaders on this important metric. Commercial activity is doing well and personal lines of auto insurance appear to be improving significantly each quarter. In the commercial and personal insurance sectors, net written premiums increased again.
Net premiums written during the quarter increased by almost 11% and set a new record at $9 billion. This was due to a large variation in renewal rate across all three segments, and all three segments posted double-digit percentage gains in premiums. In commercial insurance, travelers saw a strong change in the renewal rate of 4.9%, and premiums increased by 10%. Renewal premiums increased by 10.3%. It was solid. In Bond & Specialty Insurance, net written premiums increased by 13%, with an astonishing performance in both the Surety and Management Liability businesses. In Personal Lines, net written premiums increased by 12%, driven by strong retention and new business in the Auto and Home lines of business.
This set of results is superb and the company has once again recorded another year of increases in net written premiums, continuing a long streak of increases. They are fine. We want to hold the right stocks here and find one that the underlying company, over time, shows earnings patterns that are increasing (in the normal quarter-to-quarter variation of operating a insurance company), is not easy. Going forward, we encourage you to continue to monitor net premium growth, while monitoring underlying and combined ratios quarterly. The management executed well here. And, it is shareholder friendly.
Travelers is shareholder friendly
The company usually buys back shares. In the second quarter, Travelers repurchased 2.9 million shares at an average price of $172.57 per share for a total of $500 million. Reducing float also increases EPS. At the end of the quarter, Travelers had $3.005 billion of capacity remaining under its board-approved stock repurchase authorization. The debt-to-equity ratio was 24%, and if we control for net unrealized investment gains included in equity, the ratio was only 21.5%. This is well within the company’s target range of 15% to 25% for this metric. And as we mentioned above, this company is a dividend growth machine. We expect the dividend to continue to rise each year, and the stock now offers a 2.5% yield after the pullback.
This is a great stock to start buying now that it has repriced nearly 20% lower. We like it under $150 per share. The balance sheet is healthy and the debt ratio is solid. In terms of premium volume for the rest of the year, we would only expect to see more significant impacts on premiums written and premiums earned in the event of a larger economic contraction following a recession. absolutely serious or excessive losses due to natural events. Admittedly, Hurricane Ian will cause a lot of losses, because there has been a lot of damage, but Travelers appears well isolated compared to many of its competitors who are more heavily exposed to the South East market. In the link above, analysts have reviewed and listed the major insurers exposed, and Travelers is not there, so some buffer from other insurers.
In total, and assuming continued growth in net premiums and roughly average catastrophe gains, in terms of turnover, we expect net premiums written income of $34.5 billion to $36.0 billion. That would be a double-digit increase over last year. We expect more premiums in terms of volume, and we continue to see premium costs remain elevated in this inflationary environment. It is possible, in the event of disinflation, that premium prices will fall next year, but that remains to be seen. We think a higher combined ratio is likely, earnings will be much more normalized for the year. We believe the company sees between $13.00 and $14.00 of EPS for this fiscal year. That puts the stock at around 11.5X FWD EPS, which is attractive.
With the growth in dividends and the drop in beta of this name following this pullback, we think you want to own a stock like this in chaos.
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