Why Travelers Is a Safe Bet on Insurance

The Travelers Companies, Inc. (NYSE:TRV) provides commercial and personal property and casualty insurance to businesses, government units, associations, and individuals via its three segments, Business Insurance, Bond & Specialty Insurance, and Personal Insurance.

In its fiscal first-half release, management reported strong premium growth, outstanding bottom-line results, all-time high operating cash flows, and improving investment returns in its growing fixed-income portfolio. The second quarter marked the seventh time in a row that Travelers has generated over $1 billion of operating cash flow.

Since 2016, Travelers has invested $11 billion in major technology projects while returning over $20 billion of extra capital to investors plus it has increased its investment collection by over $25 billion.

The high-quality nature of the investment portfolio continues to perform well and has brought in after-tax net income from investments amounting to around $727 million. This growth is supported by solid terms from its increasing fixed-income part and greater returns from the non-fixed-income portfolio.

Travelers’ premium base, which was approximately $25 billion in 2016, is now over $40 billion. This growth mainly comes from the organic development of Travelers’ business model.

With its balanced and diversified business model and solid balance sheet, Travelers delivered a 13.6% core return on equity over the last 12 months, even after experiencing severe catastrophe losses that, admittedly, are fairly common across the industry. 

So with that background, what does the future look like for Travelers?

Steady Dividend Attracts Income Investors

In Q2 2024, Travelers’ total revenues increased by 11.7% to $11.28 billion compared to last year. Net income before income taxes came in at $656 million, compared to a loss of $48 million in the previous year’s period.

The company’s net income amounted to $534 million while net income per share was $2.29, compared to a loss and loss per share of $14 million and $0.07 in the previous year’s quarter.

The balance sheet looked quite healthy with $729 million in cash, up from $650 million on December 31, 2023 and that has allowed the streak of dividends to persist. Travelers has raised its dividends every year for the past 18 years.

Currently, Travelers pay an annual dividend of $4.20 per share, resulting in a 1.78% annual dividend yield. Dividends have grown at a CAGR of 5.7% for the last three years. And while the sub-2% yield seems low, the four-year average dividend yield stands at 2.19% so it’s not far from median levels.

Travelers Embracing AI To Better Serve Customers 

In July, Travelers introduced Quantum Boat 2.0 that allows for better customization of coverage options through a user-friendly platform that lets agents easily quote and bind coverage. The new system increases customer eligibility by allowing principal operators as young as 21 and extends coverage to first-time boat owners.

In May, Travelers revamped an office in Midtown Atlanta’s Technology Square to support new roles in engineering, artificial intelligence, and data science to streamline costs and improve customers experiences. It’s clear that with its new tech hub that Travelers is preparing for an AI-led future.

Travelers is also introducing new products to power growth. For example, earlier in the year, it introduced a new financial institution bond for asset managers to help safeguard against financial loss due to employee theft or criminal activities from those outside the company, including social engineering fraud, where an employee is tricked into sending money into an unauthorized account.

The bond’s arrival is a sign that Travelers’ dedication to handling new dangers and offering specific products that match the changing requirements of financial bodies.

In the same month, Travelers acquired Corvus Insurance Holdings, Inc., a top cyber insurance managing general underwriter that uses its own technology.

With this purchase, Travelers gains vital knowledge in cyber underwriting and risk management from Corvus, boosting the company’s existing cyber abilities with a successful platform.

Travelers Key Figures Moving In The Right Direction

For this fiscal year, analysts forecast Travelers’ revenue will increase 10.5% year-over-year to $41.71 billion. Likewise, earnings per share are expected to climb by 32.7% year-over-year to $17.42.

Next year, Travelers’ revenue is set to rise by an additional 7.8% to $44.95 billion. Analysts are forecasting EPS will increase by 18.3% versus last year and hit $20.61.

On the valuation front, Travelers’ appears to be trading at a steep discount, making now an attractive time to start sniffing around to buy. The forward non-GAAP PEG is just 0.69x, well below the industry average of 1.17x.

Similarly, the forward EV/Sales ratio is 1.32x, about 56.8% under the industry average of around 3.05x while the forward EV/EBITDA ratio stands at 8.87x, marginally below the sector average of 9.89x.

So what do all these figures translate to, is Travelers a buy?

Is Travelers Stock Undervalued?

Travelers appears to be sharply undervalued according to key valuation metrics that place fair value at $310 per share.

For example, a dividends multi-stage model place fair value at a whopping $436 per share while a dividends stable growth model place a $439 price target on the stock.

Admittedly, these do deviate quite considerably from the analysts consensus price target of $228 per share. Even the range among analysts is quite wide, spanning from $196 per share on the low end to $286 per share on the high-end.

Still, the low price-to-earnings ratio relative to future growth suggests there is good opportunity now for new buyers. With a P/E ratio of just 14.7x and 5-year net income growth of 8.0% forecasted, the future seems quite rosy.

For a company generating $44 billion in revenues and dropping $3.6 billion to net income, the market cap of around $53 billion doesn’t seem especially lofty by any means.

Add to that the long streak of dividend payments and you’ve got an attractive combination of both value and income.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.