The past couple of months have been miserable for the financials sector due to fallout from the coronavirus pandemic. Despite a favorable interest rate backdrop, stocks for companies in this sector have been crushed on recessionary fears. Real estate investment trusts (REITs) and banks have been hit particularly hard.

But what about property and casualty insurers? 

COVID-19 charges negatively impact first-quarter earnings

In its earnings report out last week, Travelers (TRV 0.72%) reported net income of $2.33 a share compared to $2.99 a share in the same quarter last year. Total net income of $600 million was negatively impacted by $68 million in after-tax charges related to the COVID-19 crisis. Travelers also hiked its dividend 4% to $0.85 a share. Net written premiums rose 4% to $7.3 billion as all lines of business contributed to the gain. 

A line of businessmen under a red umbrella defending against the COVID-19 virus.

Image source: Getty Images.

Travelers CEO Alan Schnitzer had this to say about the current environment: 

Although there are many uncertainties surrounding COVID-19's impact on our global economy and on us, it has been in the most challenging circumstances that the strength of our AA-rated franchise and the value we provide to all of our stakeholders shine through. Our balance sheet is extremely strong, our debt-to-capital ratio is comfortably within our target range, our holding company liquidity of $1.6 billion is well above our target level and we have a very high-quality investment portfolio. We have the talent, technology, risk management processes and procedures, and, importantly, financial strength to manage through these extraordinary times and to continue to deliver meaningful shareholder value over time."

As a property and casualty business, Travelers is GDP-sensitive. The company's business will ebb and flow with the general trend of the economy along with the preponderance of natural disasters in a given year. The COVID-19 pandemic is expected to cause some losses for the company, and the drop in interest rates will make it harder for the company to generate enough income in its investment portfolio to cover expected future losses. This is a problem for insurance companies across the board (much like it is for pension funds). At the end of the day, the actuarial tables couldn't care less that interest rates are zero. 

COVID-19 legislative and litigation risks 

In the auto insurance business, less traveling on the road is expected to reduce expected claims, although Travelers did rebate a certain percentage of premiums to customers in March and April. With regard to workers' compensation claims, having businesses shut helps control losses here as well, and the company's biggest exposure is with healthcare workers and first responders, who aren't a large part of Travelers' book. Some states are considering tweaking the presumption of compensability, which would make any COVID-19 cases a workers' compensation issue regardless if it happened in the course of employment. Since this will create a huge liability Travelers didn't count on, it is a risk the company will monitor closely. 

The other threat on the horizon will be a slew of COVID-19-related lawsuits, which the company discussed on its earnings conference call. While this risk is hard to estimate, it isn't zero. This has the potential to affect the company's expenses and liquidity, just as the company is dealing with spring tornadoes, summer wildfires, and then the hurricane season. 

Historically, Travelers is trading on the cheap side

In terms of valuation, Travelers' P/E ratio is on the low side of its historical average (see chart below). Currently, Travelers is trading at a P/E of 11 when it normally trades in a range of high single-digit P/Es to low 20s. 

TRV PE Ratio Chart

TRV PE Ratio data by YCharts

Final verdict

Travelers is a reasonably priced property and casualty insurer that has powerful brand recognition. The company trades with a dividend yield of 3.4%, which isn't bad in this current economic environment. While Travelers won't be the most exciting stock in an investor's portfolio, it is reasonably safe and should provide decent returns for the long haul, regardless of the immediate legal and legislative issues surrounding the COVID-19 pandemic.