2024-01-19 16:28:17 ET
Summary
- The Travelers Companies, Inc. is a reliable slow grower with attractive valuation and strong performance in the insurance industry.
- The company reported record quarterly net income and core income, driven by underwriting and investment results.
- Travelers has a strong buyback program and a growing dividend, making it a good long-term investment option.
- With massive gains from this trade, it is time to run a house position.
In October, we called for a buy in The Travelers Companies, Inc. ( TRV ) for reliable dividend growth and capital gains. The stock, like the company, is a reliable slow grower and was in our opinion attractively valued. We liked it because insurance is a requirement in most states and a must-have for many consumers and businesses.
After a 30% gain in 3 months, it is time to lock in profits, in our opinion. You can consider selling the initial investment, plus taking 30% of your profit, and let the rest of the profit run forever and ever in a house position. This is a key strategy we employ on the winners at our Investing Group.
While the yield is now down to the low 2% range thanks to the massive move in shares, we like holding for future gains. The company is performing well, as evidenced by the just-reported Q4 earnings . With insurance, there are winning quarters and losing quarters based on severe weather or other catastrophic events. This is going to be random, as you cannot control the weather. All along however, the company is growing membership and raising premiums, generating significant revenue. The company has such pricing power, and will continue to do so long term. The economy is holding up, so we do not see a risk of delinquent payments.
Folks, with quality insurers, it is all about the math. Travelers collects insurance premiums, and pays out claims, pocketing the difference. As we alluded to, claims volume will vary, some quarters with many claims, and others less. The Q4 quarter saw a strong top and bottom line.
Remember, the key metrics to monitor are net income, core income, the customer base (net written premiums), and the underlying combined ratios.
Net and core income metrics in Q4
Travelers reported record quarterly net income of $1.626 billion and core income of $1.633 billion, driven by both underwriting and investment results. If you look at income over the last few years, you will note that the income results vary, and this is just the nature of claims and insurance companies. This Q4 one was way above average for performance. These results crushed analyst consensus.
While the combined ratio fluctuates, it improved tremendously from last year. There was an outstanding consolidated combined ratio of 85.8%, an 8.7 point improvement, and underlying combined ratio of 85.9%, a 5.5 point improvement from the prior year.
Moreover, net written premiums in the quarter rose 13%, hitting $10.0 billion. This is a key metric to watch. Claims will vary, but as long as premiums which are, of course, revenues continue to rise, the math works out. Premiums rose due to pricing power, new business, and a strong renewal rate in most segments.
Segment performance was very strong. In business Insurance, Travelers grew net written premiums by 14% to more than $5 billion. Renewal premium change here was a whopping 11.8%, while retention was high at 87%. Further, new business increased significantly. In Bond & Specialty Insurance, net written premiums grew by 7% to $989 million, with 90% retention. In Personal Insurance, there was 13% premium growth mostly driven by higher pricing. This is where inflation helped insurers. Renewal premium change was up 21.2% in the Homeowners business and was up 16.7% in the Auto business.
Long term, Travelers remains shareholder-friendly
One reason we like holding a house position here is that Travelers has a strong buyback policy. Travelers repurchased 0.4 million shares during the fourth quarter at an average price of $184.78 per share for a total cost of $66 million. Coming into 2024, the company had $6.040 billion of capacity remaining under its share repurchase authorizations. The dividend grows year after year, and it is currently $1.00 per quarter .
While the yield has come down with the stock surge, The Travelers Companies, Inc. is a great dividend growth investment. As we look ahead to 2024, we expect another dividend hike, as well as net premium growth.
Final thoughts
We have a balance sheet here, and the debt-to-capital ratio is strong. Premiums should continue to grow. This was a fantastic quarter, and given our approach to markets we think you back out the initial investment, plus some profit, and let the rest run forever and ever, collecting all future dividends, gains, spinoffs, etc. After this spike, we like holding The Travelers Companies, Inc. stock.
For further details see:
Lock In Sizable Gains On Travelers