Thanks to recent market volatility, The Travelers Companies Inc. (TRV, Financial) has dropped to a price point that provides high margin of safety and long-term appreciation potential. If we are in the beginning stages of another recessionary sell off, Travelers can also offer capital preservation as the industry still undervalues its profit stream.
The insurance company has a long history of slow and steady growth with policies distributed via a network of more than 11,000 brokers and independent agents. It has increased sales from $24 billion to upwards of $30 billion in the last decade, almost doubling book value from $43.16 to $84.79. Travelers continues to book solid gains with the third-quarter earnings at $2.54 per share, keeping it on track to earn over $11 per share in 2019. That puts the price multiple under 10x, about 11% lower than its historic average, and six points lower than industry leader Berkshire Hathaway's forward price-earnings ratio.
The risks that insurance firms will face in the future is accurately calculating premiums based upon changes in climate, society and innovation. Last year, Travelers had to deal with a number of catastrophes, and hurricane Florence and Michael will weigh on the earnings in the near term. Travelers has significant exposure to natural catastrophes and weather-related losses. Climate change will likely make insurance for everyone more expensive; however, Travelers will be able to pass through the risk with higher premiums.
Travelers has built cost advantages in commercial insurance as one of the three largest firms in the U.S. This segment accounts for 70% of its premiums and provides safety at scale with clients across oil and gas, agriculture and inland marine.
Going into 2019, net investment income will drive earnings thanks to interest rate increases, which are likely to continue as the Federal Reserve has already alluded to at least two additional rate increases. As David Tepper (Trades, Portfolio) said on CNBC last week, "The Fed put is over," and the central bank is no longer supporting stocks. That's a good thing long term, as interest rates need to rise so that during the next recessionary climate, it will be able to cut rates to spur economic activity. In the meantime, companies like Travelers will get paid better rates for their cash.
More importantly, the company has plenty of reserves, which will provide support for its income statement. It also has a strong underwriting philosophy giving it a competitive advantage, which should result in a premium valuation relative to most, if not all, of its peers over the long term. Factor in the 2.6% dividend, and it's worth starting a new position or adding to an existing one at this price point.
This is a boring trade, yet the company's $31 billion market capitalization means it has room to grow, which is what I expect it to do.
Disclosure: I am not long or short any stock mentioned.
