Zacks Investment Research



|– The Travelers Companies, Inc | (TRV–NYSE) | $127.31 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed: News Update, Mar 6, 2018

Broker’s Recommendations: Neutral: 47.0% (8 firms); Positive: 35.3% (6); Negative: 17.7% (3) Prev. Ed.: 8; 6; 3

Brokers’ Target Price: $142.55 (↑$0.55 from the last edition; 11 firms) Brokers’ Avg. Expected Return: 11.9%

Portfolio Manager Executive Summary

Headquartered in St. Paul, MN, The Travelers Companies, Inc. (TRV) provides commercial property and casualty (P&C) products and services to a wide array of business clients. Following the merger with Travelers, the new entity is now one of the largest P&C insurers in the United States. Travelers has undergone significant transformation, exiting several businesses including some Lloyd's operations, medical malpractice insurance and its reinsurance operations.

Of the firms in the Digest group covering the stock, about 47.1% assigned neutral ratings, 35.3% gave positive while 17.7% rated the stock negatively. Of the 17 firms covering the stock, 11 brokers provided a target price ranging from $115.0 (9.7% downside from the current price) to $158.0 (24.1% upside from the current price).

Neutral or equivalent outlook – (8/17 firms or 47.1%) – The firms anticipate Travelers to leverage its scale to deliver a modest return on equity. However, at the same time, they note that its businesses are subject to market pressure.

The firms believe Travelers might benefit from commercial insurance policy growth and expected rising interest rates. They consider Travelers to be a well-diversified property and casualty insurer with limited exposure to specific customers, products and geographies.

Moreover, the firms note that delivering sustained improvement remains a challenge for Travelers as it tries to balance maintenance and improvement of underwriting margins and forays into competitive new business. They believe that if Travelers can maintain margins, counter weather problems faced in personal insurance and post a healthy premium growth rate then earnings and the multiple will expand. Travelers thus remain a lucrative pick for long-term investors.

The firms believe that Travelers will continuously work toward optimizing its book of business. However, the less robust commercial lines pricing, loss cost inflation and the stagnant interest rate environment will pressure its margins.

The firms believe that the combination of declining rate increases, moderate exposure growth, overcapitalization and a highly competitive market for new business will result in sluggish premium growth.

The firms are of the opinion that the commercial lines insurance market will not help in margin improvement for Travelers due to weak commercial lines pricing, stagnant interest rates and loss cost inflation.

However, these firms expect that Travelers shares could outperform, particularly if economic growth accelerates, leading to new business opportunities within the commercial insurance segment.

Positive or equivalent outlook – (6/17 firms or 35.3%) – The bullish firms state that Travelers stands out among competitors owing to its product breadth and clean investment portfolio. Thus, it is well positioned to reap benefits from insurance policy growth driven by an improving economic environment, aggressive capital management and rising interest rates. The commercial lines profitability also seems strong. They favor Travelers as a well-positioned commercial insurer, given its rate-driven margin expansion, which is eventually expected to translate into attractive earnings growth.

The firms believe that Travelers’ restructuring program within its personal lines segment is related primarily to its auto book, though it may lower policies-in-force and augment margins. These firms expect Travelers to maintain its underwriting margin driven by benefits from prior underwriting and pricing actions.

The company reported strong underwriting income despite the catastrophic impacts and non-cat weather-related losses year-over-year. The firms anticipate this to continue in the coming periods.

The firms have noted a decline in the yields on fixed-income investments but believe that Travelers could experience a significant rise in its earnings if there is any improvement in the rates of fixed-income investments. To weather the low yield level, the insurer also resorted to the generation of stronger returns from its insurance operations.

According to these firms, Travelers will be benefited by a favorable P&C pricing environment.

However, the firms apprehend that low net investment income and lower new money yield will affect both the bottom line and top-line results of Travelers.

Nevertheless, the firms believe that Travelers’ shares are attractively priced and could be a pick for long-term holding.

The firms also believe that near-term multiple expansions will be limited, reflecting the plateauing of the commercial lines rating environment.

Negative or equivalent outlook – (3/17 firms or 17.7%) – A firm anticipates investment income to somewhat grow in the near term, owing to interest rates moving more in line with new money yields.

May 3, 2018

Overview

The Apr 2004 merger of The St. Paul Cos. and Travelers Property-Casualty created St. Paul Travelers, the fourth-largest P&C insurer, the second-largest commercial P&C insurer, and the largest surety/fidelity insurer in the United States. In 2007, the company changed its name to Travelers Companies Inc. Travelers is based in Saint Paul, MN, and is the leading provider of P&C insurance, surety products and risk management services to a wide variety of businesses, organizations, and individuals. The company's insurance operations are reported through three segments: Business Insurance; Bond & Specialty Insurance; and Personal Insurance. Its products are distributed primarily through the independent insurance agents and brokers of America. The company has significant operations in Hartford, CT, and also has offices in the U.K., Ireland and Canada.

On Jun 10, 2014, the company announced a reshuffling of its management team, effective Jul 1, 2014, that led to the realignment of two of its three reportable business segments. The company’s International Insurance group, which had earlier been included in the Financial, Professional & International Insurance segment, was combined with the company’s former Business Insurance segment to create a new Business and International Insurance segment. The Bond & Financial Products group, which comprised the remaining businesses in the Financial, Professional & International Insurance segment, now consists of the new Bond & Specialty Insurance segment. The Personal Insurance segment was not impacted by these changes.

The firms identified the following factors for evaluating the investment merits of Travelers:

|Key Positive Arguments |Key Negative Arguments |

|Competitive Position |Fundamentals |

|One of the premier commercial insurers and a dominant player in middle |Travelers has a considerable exposure to the mutual fund industry |

|market commercial insurance. |liability losses among insurers. |

|Travelers has an extensive product offering with one of the broadest |Travelers is subject to environmental and asbestos claims, attributable|

|insurance products array for independent insurance agents. |to both general liability and product liability policies. |

| | |

|Fundamentals |Competitive, Legal or Regulatory Threats |

|Strategic initiatives in commercial lines are expected to further widen |Travelers is subject to fines and ongoing investigations as a result of|

|Travelers’ reach. |a wide range of probes into the insurance industry. |

|Segmentation capabilities in the personal lines business could generate |Insurance is highly regulated and subject to further tightening, which |

|top-line growth. |may impede Travelers’ profit generation in the future. |

|Other positives for Travelers include its strong combined ratio, new |Travelers is subject to strong pricing competition. |

|broker compensation structure and favorable tax matters. | |

For more information about the company, please visit its website at

Note: Travelers’ fiscal references coincide with the calendar year.

May 3, 2018

Long-Term Growth

According to the firms, Travelers has leveraged its size, scale and sophisticated analytical capabilities to regain its momentum of strong growth and margins. The firms view Travelers as a benchmark in the P&C insurance industry.

Travelers boasts a strong market coverage in the personal lines business and is also among the largest commercial lines insurance companies in the United States. However, the firms believe that the company’s size is unlikely to be a factor in improving profitability as the insurance market cycle softens.

The firms expect strong earnings results in the coming few years, reflecting an improvement in loss ratios of Travelers and consistent share buybacks.

The firms stated that pricing competition has intensified across most business lines but a generally favorable loss cost environment is leading to continued profitable margins and Return on Equities. In addition, competition in personal lines has increased significantly, thereby creating pressure on the smaller companies.

The firms also believe that Travelers may benefit from growth in commercial insurance policy, which in turn could be inspired by robust economic environment as well as aggressive capital management and increasing rate of interest.

The firms are of the opinion that Travelers’ long-term earnings will grow with higher short-term interest rates. Thus, Travelers remains well poised to return more to its shareholders via dividends and share buybacks or 45% of its present market capitalization.

May 3, 2018

Target Price/Valuation

|Rating Distribution |

|Positive |35.3% |

|Neutral |47.0% |

|Negative |17.7% |

|Avg. Target Price |$142.55↑ |

|Digest High |$158.00 |

|Digest Low |$115.00↓ |

|No. of the analysts with target price/ Total |11/17 |

Risks to the target price include large catastrophe loss, adverse reserve development, increased competition, deterioration in loss costs, weakness in premium pricing, absence of new business opportunities within the commercial insurance segment and inability to execute a turnaround within the personal auto insurance segment.

Recent Events

On Apr 24, 2018, The Travelers Companies, Inc. reported first-quarter 2018 core income of $2.46 per share, which missed the Zacks Consensus Estimate of $2.68 by 8.2%. However, the bottom line improved 13.9% year over year.

Total revenues of Travelers rose nearly 5% from the year-ago quarter to $7.3 billion. Also, the top line beat the Zacks Consensus Estimate of $7.2 billion.

Dividend and Share Repurchase Update

The property & casualty (P&C) insurer returned total capital of $598 million to shareholders in the reported quarter. This included a buyback of 2.8 million shares worth $401 million. The company is now left with shares worth $4.2 billion for repurchase under its existing authorization at the end of the first quarter.

The company’s board announced a quarterly dividend of 77 cents per share in the quarter under review, marking a 7% increase. This dividend is payable Jun 29, 2018 to shareholders of record at the close of business on Jun 8, 2018.

Revenues

Total revenues of Travelers rose nearly 5% from the year-ago quarter to $7.3 billion. Also, the top line beat the Zacks Consensus Estimate of $7.2 billion.

Net Premiums

Net written premiums displayed a 5.1% year-over-year increase to $6.8 billion owing to growth in each business segment, namely Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.

Net investment income

Net investment income slid 1.1% year over year to $603 million on lower private equity returns. Increase in fixed income returns due to higher average level of fixed maturity investments as well as short-term interest rates, led to this downside.

Outlook

A firm with a negative outlook estimates net investment income of $2.4 billion in 2018 and $2.5 billion in 2019.

Segment Details

Business Insurance

Net written premiums of $3.9 billion were up 3.6% year over year. A continued strong retention, an improved renewal premium change and a solid new business led to this upside.

Bond & Specialty Insurance

Net written premiums rose 5.5% year over year to $574 million, primarily driven by improved domestic surety premiums, a sustained solid retention plus an increase in new business in domestic management liability.

Personal Insurance

Net written premiums increased 7.6% year over year to $2.3 billion.

Margins

Segments Details

Business Insurance: Segment income of $452 million grew 2.3% on the back of lower segment income before income taxes, which was more than offset by decreased income tax expense.

Bond & Specialty Insurance: Segment income improved 19.3% year over year to $173 million, attributable to higher segment income before income taxes, partially offset by higher income tax expense.

Personal Insurance: Segment income surged 44.9% to $129 million, attributable to higher segment income before income taxes, partially offset by higher income tax expense.

Combined Ratio

Combined ratio is a measure of profitability used by insurance companies to analyze the company’s performance in daily operations. It is the ratio of the sum of loss and expenses incurred to the premiums earned.

Travelers reported an underwriting gain of $258 million, up 22.3% from the year-ago quarter. Combined ratio improved 50 basis points (bps) year over year to 95.5% owing to higher net favorable prior-year reserve development and a benefit derived from catastrophe loss. However, a higher underlying combined ratio partially offset this improvement.

Business Insurance

Combined ratio deteriorated 110 bps year over year to 97.5% due to higher underlying combined ratio as well as catastrophe loss. However, higher net favorable prior-year reserve development partially offset this downside.

Guidance

For the remainder of 2018, the company projects higher underlying underwriting margins compared with the same period of 2017, while the underlying combined ratio is anticipated to be low.

Bond & Specialty Insurance

Combined ratio improved 470 bps year over year to 74.7%, owing to lower underlying combined ratio as well as catastrophe loss along with higher net favorable prior-year reserve development.

Guidance

For the next two quarters of 2018, the underlying underwriting margins as well as the underlying combined ratio is expected to remain consistent with the same period of 2017. In the last quarter, the company anticipates the underlying underwriting margins to be higher and the underlying combined ratio to be lower than the same period of 2017, attributable to a charge for a single international surety loss in fourth-quarter 2017.

Personal Insurance

Combined ratio improved 210 bps year over year to 97.5%, backed by a higher net favorable prior-year reserve development and a benefit derived from catastrophe loss, partially offset by a higher underlying combined ratio.

Guidance

The company projects underlying underwriting margins for the remainder 2018 to be higher than the same period of 2017, while the underlying combined ratio is anticipated to be low.

Earnings per Share

Travelers’ 1Q18 core income of $2.46 per share missed the Zacks Consensus Estimate of $2.68 by 8.2%. However, the bottom line improved 13.9% year over year.

This year-over-year increase in earnings can be attributed to higher net favorable prior-year reserve development along with a solid underlying underwriting gain. Moreover, lower income tax expenses, driven by the reduced U.S. corporate income tax rate also contributed to this upside. However, a benefit of $39 million in the prior-year quarter from the settlement of prior-year tax matters, partially offset this upside. Nonetheless, the bottom line was boosted by share buybacks.

Outlook

A firm with negative outlook raised its 2018 and 2019 operating EPS estimates to account for higher alternative returns.

Another firm with negative outlook lowered its 2018 and 2019 operating EPS estimates to account for the first-quarter earnings performance.

A firm with neutral outlook lowered its 2018 and 2019 operating EPS estimates to take into account the adjustments made to its investment income and share repurchase projections.

|Research Analyst |Trina Mukherjee |

|Copy Editor |Pramita Bose |

|Content Ed. |Tanuka De |

|Lead Analyst |Tanuka De |

|QCA | Tanuka De |

|No. of brokers reported/Total brokers | |

|Reason for Update | 1Q18 Update |

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Zacks Investment Research Page 7

May 3, 2018

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